Netflix Valuation Report

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08/02/20 Finance Reference this

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Market Cap: $166.96B 

Netflix, Inc. (NFLX)                                                  Recommendation: SELL

Sector: Communications                                   

Industry: Consumer Services

Price: $381.89 +4.55(+1.21) At close 4/24/19

Price Target: $417

Last Split:7/15/2015

Founded: Aug 29,1997 Country: United States

FIGURE 1 –NETFLIX STOCK CHART (wsj.com,2019)

 

FIGURE 2 – Profile

Market Profile                                                                        (Yahoo Finance, 2019)

52-week range

$231.33-423.21

Institutional Holdings (%Float)

77.15%

Intraday Low/High Price Range

$374.77-384.80

Insider/Stake Holdings (%Outstanding)

1.74%

Volume

10,089,820

Short Interest (%Float)

3.51%

Shares Outstanding

437.19M

Book Value Per Share

13.05

Float

430.59M

Debt to Equity

196.26

Market Cap

166,959,211,254

Return on Equity

26.02%

COMPANY OVERVIEW

 In 1997 Marc Randolph and Reed Hastings in Scott Valley,California , founded Netflix ,which originally was launched as a DVD home delivery rental website  in 1998 and 1999 with subscription service for unlimited DVD rentals at a fixed monthly price (Larker & Tayan, 2018). 10 years after being founded, Netflix presented their streaming service which eventually became their primary and leading business in the United States (Larker & Tayan, 2018). The company delivers media streaming subscription-based service to over 100 million paid users in 190 markets with only 5,400 employee (Forbes.com, 2018). Netflix  returns for 2017 were of over $11B dollars which equated to a growth of 36%, Netflix augmented their subscription memberships by an additional 24M dollars, and improved the overall ROE  to more than twice compared to 2016 (Netflix Investors, 2018).

TECHNOLOGY

Tech giants such as Apple,Amazon,Google and Samsung introduced products such as the Smart phone, iPad ,Note, Kindle Fire Amazon products such as the Kindle Fire, and the fire Stick and Google enabled Netflix  to use and capitalize these technological improvements  to help grow the volume of users (Netflix Investors, 2018). With the arrival of Apps(applications) being able to use on these user friendly compatible devices, the marketplace has been able to develop not only locally but worldwide. Customers aren’t the only people showing their gratitude for Netflix’s content,the network was awarded 23 Emmy  in 2018 in addtion to the 112 Emmy Nominations in a six year period (Statista, 2018) .The awards and popularity  put them in position to move forward and create more original movies and TV series (Netflix, 2019).

MANAGEMENT AND GOVERNANCE

Shareholders

Netflix presented investors with its first opportunity to invest with its IPO (Initial Public Officering )in 2002 according to appendix A . The apparent observation of Netflix website, illustrates that the company preserves a transparent style as it  attempts to keep astronomical communication with all investors (Netflix Approch to Governance, 2018). In their April 11, 2019 the CEO delivered a letter to shareholders addressing the concerns of Netflix price drop indicated on its earnings report that also  displayed frail guidance (cnbc.com, 2019). There was also apprehensions about the retirement their CMO Kelly Bennet,who spearheaded a five-fold jump in  online video-streaming of paid subscribers 139 million (Nicholson, 2019). The company sustains a wide-ranging overview, detailed fiscal analysis, and all statistics needed for new investors and knowlegable shareholders who may have been investing from the beginning .

Corporate Management                                                                            

The the original  co-founder Reed Hasting is listed as the the CEO.The Chief Marketing Officer position is still vacant,ever since Kelly Bennet March 7,2019 resignation.Rachel Whetstone is listed as the CMO(Chief Communication Officer),David Hyman is servs as the  General Counsel, Greg Peters is the company’s Chief Product Officer,Spencer Neumann​ is the new CFO and Ted Sarandos is listed as the Chief Content Officer . The managment team consist of a very diverse and knowledge professionals. 

Company Governance

Netflix web page shows Reed Hastings,the current CEO leads the governance section of  gifted  executives, with expertise and experience from other top organizations (Netflix inc., 2019). Netflix uses a totally different approach from other fortune 500 companies . It integrates two exceptional practices. Board excutives  periodically attend in the compacity of observation only.The communication with the exectives comes is presented  in a manner of online memos that allows senior directors to ask questions and make remarks within the file (David Larcker, 2018). Executives have the options to  alter the text and answer questions in what is basically an active file.Netflix inspires its leadership to time to observe  how the company functions in normal conditons.  Breakthrough innovation by the company is the way the the company’s execs communicate with a 30-pages online memos  that  includes links of  supportive analysis with open access to data on the company’s  internal systems (David Larcker, 2018). This includes the ability for directors to ask concise questions about enquiries of the subject authors. The memos consist  of written highlights of  corporate performance, current trends,new developments to be competive , and other strategies. This approach by the streaming giant to organization governance is a deep-rooted direct reflection of its  culture and leadership. The organization culture underscores distinct initiative, information sharing , and outcomes over the processes.The board will continue to make decisions on how to invest into its website content, international expansion, and the substantial cost and risk of producing new types of content (Netflix Approch to Governance, 2018).

FIGURE-3 NETFLIX VS COMPETIORORS VOD USERS

FIGURE-5

        FIGURE-6

COMPANY POSITIOING

Competitors

Online media  streamimg companies such as Amazon Prime  ,Hulu and HBO Now are simlar to Netflix. One of the main differences between Netflix and its competitors is its massive wealth of original content.As evidence from figure 3 above ,Netflix controls the U.S VoD(Video on demand) marketplace with 77% of all VoD paid users. With a comfortable 21% lead on Amazon and other lagging behind, Netflix currently has the momentum in the U.S. where the tactic of producing more original content which a remarkable  compensation from paid user growth and a more assortment of media content concentration than their many competitors (Statista, 2018).  In 2017 Netflix created over 300 of its own media content  , a number which 

has increased in 2018 and a planned 100 more between 2019-2022 (Netflix inc., 2019).In 2018, Netflix was the  top rated TV network in America. Popular shows like “Stranger Things” and “House of Cards”  House of Cards,  made innovative programming essential to the company’s continued accomplishment. More than a third of its users surveyed stated that Netflix’s original are their main reason they enjoy  Netflix’s platform over other competitors , and over 60 percent of paid users say that original shows are either very significant or unequivocally critical when it comes to their deceion to  use Netflix over a competitor (Statista, 2018).Another advantage  over competitors is Netflix effort and willingness to make the big deals to bid and pay  for special ventures with the most popular stars in the entertainment industry stars,which demostrate  its’ bid to win the competitive on-line streaming wars poised to be the go-to place to watch Beyoncé. R&B singer Beyonce singed a  three project deal for $60 million (Nicholson, 2019). 

POLITICAL & REGULATORY ENVIRONMENT  The Federal Communications Commission (FCC) applied  a measure entitled “Restoring Internet Freedom Order” for the purpose of  decreasing regulations on internet service providers (Federal Communications Commission, 2018). The measure doesn’t directly impact Netflix ,but the potential of being  detrimental for the cost for faster internet  will unavoidably lead to a decline in  subscribers who stream media (Shepardson, 2018). Netflix   gained the attention unhappy conservative politicians and the Trump administration  labeled the network as “ liberal entertainment” after President Barack Obama and his wife signed an exclusive deal to  produce a number of new programming ,which followed two after Former Ambassador  and U.S National Security Advisor Susan Rice joined the Board of directors. Philip Wegmann of the Washington Examiner criticized the left leaning deals as a kickback by Netflix for Obama’s net neutrality law which defended the bottom line of the streaming service by supporting net neutrality his entire  presidency .Wegmann’s opinion ignited Twitter with the  trending topics  online to Boycott Netflix or Cancel Netflix to condemn the company over its announcement it was bringing on the Obamas.

LEGAL & ETHICAL ENVIRONMENT

 Netflix indicates on their website that   video piracy is a major threats  (Netflix inc., 2019).  Internet piracy has been considered unstoppable on the digital mark. As soon as music, movie, and video game organizations close pirate sites that make copyrighted material available to the public. After each site is closed, a new one would appear, such the infamous Pirate Bay website which has been forced to taken down more than a dozen times only to rebirth. Entertainment and software companies has expressed their industries is would suffer due to lost profits from piracy if they weren’t given the tools to fight internet piracy, the federal government  passed draconian internet regulations like SOPA and PIPA (Lenova, 2017)

ANALYSIS

Figures 4 shows the U.S DVD memberships is at the  bottom of all segments due to more demand of streaming services, the highest margin is followed by national streaming which overlaps with the most membership segment.  Netflix streaming subscribers around the world from the 3RD quarter of 2011 to the 1ST quarter of 2019. In the 1ST quarter of 2019, Netflix had over 158 million streaming users worldwide (Statista, 2019). Observation of  data and comparison  to the above (figure 3) of growth for the previous 3 years verus Amazon  it’s obvious  that Netflix is progressively increasing in sales and the competitors is also growing at an extraordinary pace. Figures 5 and 6 includes totals for revenue and net must be noted that while Netflix services basically 3 sectors (Craft.co, 2019)with DVD, local streaming, and international streaming,  With its numerous amount segments and high sales, the writer was not able to find the income report that specified Amazon Prime alone. It may appear that competitors have more than three times in sales as Netflix, however, it should be noted that the sales are broad and not for media streaming alone.  Observation from the chart (figure 4) at the end of the prior quarters, while global memberships are slowly increasing (figure 4) and making the overall memberships growth slowly increase. In 2017 the domestic streaming memberships somewhat peaked and had a minimum increase in 2018.

FINANCIAL ANALYSIS

FIGURE 7 – DUPONT ANALYSIS

2014

2015

2016

2017

2018

RET. on Assets

4.06%

1.25

1.54%

3.35%

3.70%

RET. on Equity

15.95

5.86%

7.56%

17.24%

25.81%

Equity Multiplier

3.799

4.589

5.07

5.07 %

6.45%

Profit Margin

5.62%

2.37%

2.69%

5.65%

 7.84%

Total Asset Turnover

.78

.66

.65

.65

 .61

FIGURE 8 – LEVERAGE AND EBIT 

YEAR

2014

2015

2016

2017

2018

LEVERAGE

3.80

4.59

5.07

4.31

 4.96

EBIT MARGIN

7.26%

4.05%

4.65%

6.19%

 10.43

(Netflix, 2019) 

After assessing the DuPont Analysis, the evaluation for Netflix resulted in being a positive analysis in 2014 and 2015.  there was a positive, however in 2015 the PF (profit margin), ROA (return on assets) and ROE (return on equity) declined in years 2015 and 2016, simultaneously the EM (equity multiplier) seen an increase. Which close observation the later information mentioned correlates with the events such the “House of Cards” on the company’s  historical timeline displayed on appendix A, which shows that up until 2013, Netflix was in the process of releasing their own series while at the same time was trying for entry into the international markets in 2015. The expenses of development contributed to the significant part of the company financials in 2015 but with that growth.  By 2016 Netflix reached other markets, there is a firm surge in the ROA and ROE. The numbers surpassed preceding years with Netflix also declaring in market of 190 regions worldwide in 2017 in excess of 100 million plus users (Netflix Financials, 2018). In a period of a 4-year span the company smartly planned for a possible reduction in returns with the risk of much larger future returns, which paid off exponentially by exceeding their shareholders expectations as shown in Figure 1. The amount of stocks produced a shrinkage from the years 2012 to 2015, while the value conversely with an upsurge gradually through today (Netflix stock chart, 2018). The most important financial information that can’t be overlooked is the data that was collected from the company website dedicated to investors and public. The company publishes each quarterly financial statement. For the purpose of providing accurate information for this written report, the author acquired data from the Netflix investor site.

VALUATION

FORECASTS 

. The forecast is a brief summary of the Q1 (1st quarter) for 2019 before forecasting the Q2 for 2019 .IN Q1 2019 the paid memberships improved to 26%, in the same time frame the ARPU dropped 2% because of the currency exchange rate. The worldwide streaming ARPU improved 3% and 2% over the year sequentially, exclusive of F/X, the entire income growth of 22 % equates against the 40% in the Q1 of 2018, which profited from numerous price fluctuations in the Q4. The revenue grew 28% for the first quarter. The company’s beginning expectations for its operating margin for the of quarter was exceeded resulted in of 10.2%. Earnings per share (EPS) of $0.76 vs. $0.64 in the previous year included $58M dollars non-cash unrealized increase from FX (forex) measurement of its Euro debt. The Streaming content requirements declined sequentially in Q1 because of series obligations run times. Netflix will raise its own original content, will create more volatility in content obligations from 1 quarter to another due to the timing of productions start date. The company implemented a new content accounting standard (ASU 2019-2) in Q1’19. There is no material influence as the content accounting policies is consistent with the new rules. For Q2’19, the projection of total paid net adds of $5.M, with $3M in the US and $4.7M for the international segment. This would put us at $14.6M paid net adds for the first half of 2019, up 7% year over year. With a series of price increases in the North America, South America and parts of Europe. The United States so far is likely and is following in the same way to what was observed in Canada with a decline in Q4’18, with gross additions are modest, there is uncertainty with temporary mix effect as paid members agree to the price change. The international content is expected to be strong in the Q3 and Q4 of the year.  The new seasons of the company’s famous series will start in July with a lineup that includes Stranger Things as well as big movies with big name directors like Martin Scorsese’s “The Irishman”. 2019 is expected to be a record year with paid net adds. Both streaming ARPU (+2% vs. -2%) is projected to have an acceleration. The revenue growth (26% vs. 22%) in Q2 vs. Q1. Which does not include currency, the streaming ARPU and revenue will increase 7% and 32% in Q2. There will be roughness from one quarter to the other in the company’s operating margins because of spending, the 2019 total operating margin target is unaffected, which indicate that the operating margin in the third and fourth quarter is expected to be higher than Q1 and Q2. The new US tax reform passed by the Trump Administration created the opportunity for the company to reorganize the corporate structure for simplicity. The outcome of tax reform and new company structure effective tax rate will be higher in 2019, with an anticipated projection of an effective tax rate of 48% in Q2’19 due to a one-time occurrence. Longer term, it is expected that the effective tax rate to have a downward movement toward U.S. federal rate (Netflix, 2019).

ESTIMATES

The estimate trends for Q2 for 2019 is currently at $.57, one month ago it was $.99 and three month ago it was $.99. The estimate trends for Q3 for 2019 is currently at $1.05, one month ago it was $1.26 and three months ago was $1.26.

PRICE TARGET

According to the financial breakdown in this report, it is assessed the price target of Netflix stock growth to normal at around $417 which is in with the median target price of $420. Given the robust net adds growth trends in in 1Q leading into the start of Q2 of continued subscriber growth with higher pricing.  Netflix presents a truly convincing value proposition with worldwide appeal (Netflix, 2019).

INVESTMENT RISKS

Netflix currently faces many unforeseen situations within the industry that may deter the scope of the enduring view of the shareholders. Netflix recognizes these threats in their website investment information which mainly shows a negative cash flow for the foreseeable future (Netflix Investors, 2018).  The current risk of investment to Netflix is Disney, who allocates more spending in content than anyone else worldwide. Disney recently announced they will invest $500 million in its new streaming service “Disney+” which is due to launch November 12 (Spangler, 2019). Disney+ will have over 7,500 television shows and 500 movies available online (Michelle Yan, 2019). With Disney specialty in targeting the children audience and the purchase of Marvel Comics with its blockbuster movies will stream exclusively on Disney, not on Netflix.  Disney will also release new classic sequels to Toy Story 4 and others. A $6.99 monthly subscription compared to Netflix current $12.99 subscription is a threat, not that Disney has lower volume. Some analysts are predicting a $170 within 12 months and within 3–5 years, it could easily double from today’s price of $135 (McBride, 2019).Disney threat always existed, but like others in streaming now started late behind Netflix .Disney is now approaching  a whole new way to monetize its content. Disney estimates Disney+ will reach 60–90 million paying subscribers by 2024.Over all the larger risk may not to keep up with Disney but is more like the competition of staying current with new movies rather than old movies. It’s an expensive and risky proposition, which involves new valuation metrics which (Mourdoukoutas, 2018). 

OPERATIONAL RISKS

Netflix CFO position changed when David Wells resigned on  August 13, and was replaced by  Spencer Neumann in January 2019.The company also put a new CCO, VP of Inclusion Strategy, and added a new executives on the board of directors (Netflix, 2019). The stock current stocks prices are ranges from $221.33-423.21 (Yahoo Finance, 2019), it’s was somewhat dangerous to appoint a new CFO during that time, Neumann will follow David Wells 14 years of success. 

COMPETITION RISKS

Based on the past periodic reports, Netflix should have a larger increase in users’ subscriptions than what was reported to their shareholders in Q1. Amazon Prime, Hulu, and other competitors, not to mention the news buzzing with possibility of Disney, it’s obvious that an upsurge in memberships has peaked, because the parity in online streaming giving the consumer more choices within the market for media services. As stated earlier in this report, the number of membership subscriptions peaked last year with a slight growth (figure 4), this may suggest a flooded market with too many choices for the consumers for streaming. Currently there is not harmful to the revenues, however investors must continue with cautious as with any investment due to unpredictable events in the industry to keep an eye out for change.

INVESTMENT SUMMARY

While the company remain with free cash flow in the negative, an investment is the recommendation for Netflix, the company is fairly increasing despite the fluctuating ROE (return on Equity) which indicates the company has debt to invest with imminent technological developments. Very similar to the time when the company invested in Netflix original series, such as “House of Cards” which proved to be a wise investment. Another example is when Netflix expanded in the worldwide, the price originally dropped the amount and share price, yet it still steadily improved in both areas overtime.  The Federal Communication Commission  still presents uncertainty in its decision with  net neutrality ,it still some unknows on how it will effect major networks and online media services like , the writer of this report did not consider possible FCC actions in the investment summary without more data ,all information used in report is  made on decisive evidence. The research information collected and provided for this report indicates Netflix is not suitably valued at its current share price and as a SELL with the instability of the price within the past year. Investors should sell now before the price drops; it is forecasted to return to a lower price and decrease the cost of EPS.

DISCLOSURES

Intellectual property and material ethical use: The writer of this company evaluation does not maintain any financial interest in Netflix. The writer, or any associate of their domicile, of this company valuation has no prior knowledge of any type of conflicts of interest that might present a predisposition of the material or publication of this company evaluation.

RECEIPT OF COMPENSATION

The writer of this company valuation didn’t and will not receive any financial compensation based off the financial analysis.

POSITION AS AN OFFICER OR DIRECTOR

The writer of this company valuation never served on any type board past or present, as an official or consultant, the writer does not own any stock in the company evaluated make investment.

DISCLAIMER

The information contained and reported in this financial analysis have been obtained from sources available publicly and believed to be reliable as a source for the purposes of this report. The author does not guarantee accuracy as this information is not intended to be reported for any investment purposes or to be used in the private sector.  This report should not be a recommendation by any individual affiliated with this University San Antonio about this company’s stock. The info contained is not projected to instruct users on investment or financial decisions and is used exclusively for informative purposes as requested by TAMU San Antonio graduate program. 

Appendex A

References

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  • Craft.co. (2019, april 23). craft.co. Retrieved from craft.co: https://craft.co/netflix/competitors
  • David Larcker, B. T. (2018, may 8). How Netflix Redesigned Board Meetings. Harvard Business Review. Retrieved from https://hbr.org/2018/05/how-netflix-redesigned-board-meetings
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  • McBride, S. (2019, April 25). The surefire way to make millions in America. Riskhedge.
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  • Netflix Approch to Governance. (2018, May 1). Retrieved from Netflix investor.
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  • Netflix, I. (2019, april 16). Netflix Investors. Retrieved from Netflix Investor.com: https://www.netflixinvestor.com/financials/quarterly-earnings/default.aspx
  • Nicholson, L. (2019, march 7). reuters.com. Retrieved from reuters.com: https://www.reuters.com/article/us-netflix-moves-cmo
  • Spangler, T. (2019, April 11). variety.com. Retrieved from Variety: https://variety.com
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