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Analysis and Valuation of Netflix, Inc: Stock Recommendation for Retail Investors PDF Free Download

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PRAGUE UNIVERSITY OF ECONOMICS

AND BUSINESS

Faculty of Finance and Accounting

Department of Corporate Finance

DIPLOMA THESIS

2024 Maria Miguel Nogueira Baptista

PRAGUE UNIVERSITY OF ECONOMICS

AND BUSINESS

Faculty of Finance and Accounting

Department of Corporate Finance

Study Program: Finance and Accounting

Analysis and Valuation of Netflix, Inc

Stock Recommendation for Retail Investors

Author: Maria Miguel Nogueira Baptista

Supervisor: Ing. Pavel Svačina, Ph.D.

Year of Defense: 2024

Declaration of Authorship

I declare that I have worked on my master's thesis titled "Analysis and

Valuation of Netflix, Inc: Stock Recommendation for Retail Investors" by myself and

I have used only the sources listed in the bibliography at the end of this thesis. As the

author of the master's thesis, I declare that the thesis does not break any copyrights.

I declare that I grant permission to Prague University of Economics and Business

to reproduce and to distribute copies of this thesis document in whole or in part.

In Prague on May 20, 2024

.....................................................................

Acknowledgement

First, I would like to express my sincere gratitude to Professor Ing. Pavel

Svačina, Ph.D. for his guidance and support during the writing of this dissertation.

I would also like to express my gratitude to Professor Jorge Farinha for giving

me the opportunity to be part of this Double Degree Program in Prague, which was

undoubtedly an enriching experience both personally and academically.

A special thank you goes to my parents and brother for all their support and

love during this journey. They will always be my greatest support.

I am also grateful to my friends who have always been there for me, even 2500

kilometers apart.

Lastly, I am also thankful to my housemates who were part of this adventure

in Prague, of which I have unforgettable memories. There are no words to express my

gratitude for their support. They are also responsible for my success.

Abstract

The aim of this master thesis is to analyze and understand Netflix, Inc. business,

evaluate its position within the industry and determining its intrinsic value. The

valuation date was set to April 16, 2024. The first chapter provides an overview of

Netflix Inc., including its history, business model and stock performance. In the

subsequent chapter, a detailed analysis of the media and entertainment industry is

presented, examining key trends, competitors and market dynamics, for a deeper

understanding of Netflix position within the industry. Then, in the third chapter, a

financial analysis is conducted to assess Netflix financial performance and growth

prospects. In the next chapter, after establishing some assumptions to project the value

drivers, it was performed the valuation of the company through a Discounted Cash

Flow (DCF) model. Additionally, a valuation based on market multiples was also

presented to complement the DCF valuation. After that, in the investment risks section,

a sensitivity analysis is conducted to evaluate the impact of key inputs on the DCF

valuation and the possible scenarios of the intrinsic share price. Lastly, based on the

valuation results and risk assessment is presented a final recommendation for

investors, in the Investment Summary chapter.

Key words

Netflix, Valuation, Intrinsic value, DCF model, Market multiples

Table of content

Introduction ............................................................................................................. 7

1 Company Overview ........................................................................................ 10

1.1 Netflix history ................................................................................................ 10

1.2 Netflix portfolio .............................................................................................. 13

1.3 Key executives and key shareholders ............................................................. 16

1.4 Historical stock performance ......................................................................... 18

2 Industry Overview and Competitive Positioning ........................................... 20

2.1 Media and entertainment industry .................................................................. 20

2.1.1 Trends in M&E industry .............................................................................. 20

2.2 OTT Market .................................................................................................... 23

2.3 VoD Market .................................................................................................... 23

2.4 Peers ............................................................................................................... 24

2.5 Porter’s 5 Forces ............................................................................................. 28

2.6 SWOT Analysis .............................................................................................. 32

3 Financial Analysis .......................................................................................... 33

3.1 Balance sheet analysis .................................................................................... 33

3.2 Income statement analysis .............................................................................. 35

3.3 Ratios Analysis ............................................................................................... 36

4 Valuation ........................................................................................................ 42

4.1 DCF valuation ................................................................................................ 42

4.1.1 Income statement projection ........................................................................ 44

4.1.2 Balance sheet projection ............................................................................... 56

4.1.3 Free Cash Flow to the Firm Calculation ...................................................... 65

4.1.4 Growth rate calculation ................................................................................ 66

4.1.5 WACC calculation ....................................................................................... 67

4.1.6 Determine Valuation .................................................................................... 69

4.2 Relative Valuation .......................................................................................... 71

4.3 Summary of Valuation ................................................................................... 75

5 Investment risks .............................................................................................. 76

5.1 Market risk ..................................................................................................... 76

5.2 Operational risk .............................................................................................. 77

5.3 Regulatory risk ............................................................................................... 78

5.4 Macroeconomic risks ..................................................................................... 79

5.5 Risk matrix ..................................................................................................... 81

5.6 Sensitivity analysis ......................................................................................... 82

6 Investment Summary ...................................................................................... 84

Conclusions and Added Value .............................................................................. 87

Literature ............................................................................................................... 90

List of Figures, Graphics, Tables, and Abbreviations ........................................... 94

List of Annexes ..................................................................................................... 98

Introduction

The retail investors' interest in the financial markets has increased over the

years, particularly beyond 2020. Retail trading just wrapped up a record year in 2020,

as unprecedented market volatility and Covid-19 crisis created a unique opportunity

for individual investors to create and control their own portfolio. This wave of retail

investors entered in the stock market reflected a shifting landscape in the stock markets

globally. (Ortmann et al., 2020)

Social media platforms like the Reddit community WallStreetBets and Twitter

empowered retail investors to engage in the stock market since they allowed to share

investment ideas, market insights, and trading strategies. Besides that, accessible

trading platforms like Robinhood made it easier for retail investors to access financial

markets because they offered commission-free trading and user-friendly interfaces. In

addition, the low or negative central banks interest rates also supported this trend.

Furthermore, stocks with high growth potential and speculative opportunities

captured the investors’ attention. Big tech stocks, including companies like Amazon,

Apple, Microsoft, Facebook (now Meta Platforms) and Netflix, were seen as hype

stocks due to the dominance performance of these companies in the market.

Regarding Netflix it has become a game-changer in the entertainment industry

reshaping the way people consume media and entertainment. Starting with a DVD

rental service, Netflix successfully adapted its business model to where the industry

was going, becoming the largest streaming service worldwide.

As a strong player in the streaming sector, Netflix had acquired licensed

content and produced award-winning original content to create consumer engagement.

Starting with its subscription-based model, Netflix cultivated a loyal customer base,

driving significant growth and expansion over the years. Most recently, Netflix

launched a new subscription plan with ads at a more affordable price to attract more

subscribers.

Netflix's expansion and market share have been remarkable, especially

considering the increase of competition in the streaming industry over the last years.

Looking ahead, Netflix faces a future characterized by intensified competition in the

entertainment sector, since the rapid evolution of technology and digital

transformation are changing consumer behaviors, especially among younger

generations.

Therefore, the aim of the following dissertation is to assess the underlying

value of Netflix shares in order to issue a recommendation for a retail investor. An

important aspect of investment decision-making involves evaluating whether a stock's

current price accurately reflects its underlying value. Thus, it is important to analyze

the company's financial health, the growth potential and also the industry dynamics

and possible competitive advantages.

First and foremost, I would like to emphasize that I only used exclusively

publicly accessible sources for this analysis, including the annual reports of Netflix

and comparable companies, as well as information from databases like Refinitiv,

Yahoo Finance, Investing.com, and S&P Global.

The first chapter presents a comprehensive overview of Netflix by examining

its history, business model and stock performance to trace its evolution into a leading

player in the industry.

The next chapter introduces the industry overview by analyzing the current

market trends and market dynamics in the entertainment and media industry. In

addition, a comparative analysis of industry peers and Strategic frameworks such as

Porter’s Five Forces and SWOT are present to understand Netflix's strategic

positioning within the industry.

Then, in the financial analysis chapter, the latest annual reports of the company

are examined in order to compute the evolution of balance sheet and income statement.

The profitability, productivity, leverage, liquidity and market ratios are calculated to

provide insights of the company financial performance and operational efficiency.

Furthermore, the valuation chapter introduces the Discounted Cash Flow

(DCF) model and Relative Valuation methods to determine Netflix's intrinsic value.

By forecasting future cash flows and comparing the company's valuation multiples

with industry peers, these analyzes offer a comprehensive assessment of Netflix's

investment potential.

Afterwards, in the investment risks chapter, it is present the inherent market,

operational, regulatory and macroeconomic risks. Also, since the DCF valuation relies

on a series of key assumptions, it is performing a sensitivity analysis to evaluate the

impact of those assumptions and enhance the robustness of the valuation.

Lastly, the investment summary chapter presents a succinct summary of the

findings, offering a final recommendation for investors considering an investment in

Netflix stocks.

1 Company Overview

Netflix, Inc is an American media company headquartered in Los Gatos,

California, USA. With a strong worldwide presence and the largest subscriber base,

Netflix occupies a leading position in the entertainment streaming market.

The following chapter provide an examination of Netflix’s corporate landscape

and its evolution over the last years. It presents the history of Netflix, the evolution of

its business model and the key executives. Furthermore, the Netflix's historical stock

performance is analyzed in order to gain an insight into its financial trajectory and

market positioning. Through this comprehensive overview, it is possible to understand

the Netflix pivotal role in shaping the digital entertainment landscape.

1.1 Netflix history

Launch as a mail-based rental business (1997-2006)

Netflix was founded on August 29, 1997, by Marc Randolph and Reed

Hastings as a DVD rental American company. Initially Netflix offered a per rental

model for each DVD, but two years after, Netflix changed its business model by

implementing an online monthly subscription service through its website, where

members, paying a monthly fee, were able to rent unlimited DVD via Internet, and

then receive them at home, via mail.

After the success of this methodology, supported by the increase of DVD

player sales, Netflix announced an initial public offering on May 23, 2002, selling 5,5

million shares of common stock at a price of $15,00 per share. The shares were quoted

on the Nasdaq National Market under the symbol "NFLX". (Netflix, 2002)

The membership metrics rose sharply, reached 1 million subscriptions in 2003

and hit 5 million on 2006.

Transition to streaming services (2007-2012)

In 2007, the company introduced a streaming service in which, subscribers

were able to watch series and films via the Internet. Then, in 2010, Netflix expanded

internationally to Canada, its first international market, follow by Latin America

(2011), UK, Ireland, Denmark, Finland, Norway and Sweden (2012) – Nordic

countries- and Netherlands (2013).

Development of original programming and distribution expansion (2013–2017)

The year of 2013 represents an important milestone for the company since it

was the year in which the company started producing original content. So far, the

company only had license content. The release of House of Cards was the first Netflix

original production followed by Orange is the New Black that had been one of the

most-watched series.

In the following years, the Netflix´s expansion continued exponentially,

reaching 100 million subscriptions in 2017.

Expansion into international productions (2017–2020)

Between 2017 and 2020, Netflix embarked on a series of strategic moves to

solidify its position as a dominant force in the entertainment industry. Notable deals

included partnerships with renowned directors and made significant acquisitions,

while simultaneously expanding its original content library. During this period, Netflix

was recognized with multiple awards, being the most-nominated studio at the

Academy Awards and Emmys in 2020.

Expansion into gaming, Discontinuation of DVD rentals and the WWE

agreement (2021– present)

The most recent years can be seen as an investment in diversification with the

introduction of mobile video games in 2021, which was included in subscribers' plans

at no additional cost. Furthermore, on 2023, Netflix announced the discontinuation of

its DVD-by-mail service, which had served over 5 billion shipments throughout its

lifetime.

In the present year, 2024, Netflix announced a major agreement with WWE

(World Wrestling Entertainment), acquiring international rights to live weekly its

programs, expanding its content portfolio. This decision signaled a shift in the core

business focus towards digital streaming, games and movies and series (original and

licensed content).

Nowadays, Netflix is one of the world's leading entertainment services with

over 260 million paid memberships in over 190 countries enjoying TV series, films

and games across a wide variety of genres and languages. The library of TV series and

movies varies depending on the country and changes over time. (Netflix, 2024e)

Figure 1 - Worldwide Availability of Netflix

Source: Wikipedia

Available

Not Available (China, Crimea, North Korea, Russia, Syria)

1.2 Netflix portfolio

Until 2023, Netflix operated in two main segments - the streaming plan

(globally) and the online DVD rent service (only nationally) - two services that Netflix

provides to its customers based on the monthly subscriptions fees that its clients pay.

Considering the DVD rental service, by paying a monthly fee, clients can rent,

via internet, a film or TV series and, in the next business day, the disc arrives at their

homes, via mail. Each member can choose between the standard plan and the premium

plan. The only difference between these two packages is the number of discs that the

client can rent out-at-a-time. This segment has been decreasing its ability to generate

revenues, due to the continuous reduction of the number of paid subscribers.

Therefore, in April 2023, the company announced that they will discontinue DVD-by-

mail service in September 2023. The discontinuance of the DVD business had an

immaterial impact on the company operations and financial results. (Netflix, 2023a)

Regarding the streaming service, Netflix customers can choose between three

different memberships plans: the basic, the standard and the premium. They differ in

terms of video resolution, the number of simultaneous streams allowed and the

maximum number of devices permitted for content downloads. The price and the

features of which plan varies by country, but they are similar. It is important to note

that Netflix periodically adjusts its subscription prices and may introduce new plans

or features in response to changes in the market or user preferences.

By the end of Q1 2022, Netflix estimated that approximately 100 million

households globally were engaging in password sharing, with more than 30 millions

of those in the US and Canada. In its quarterly communication to shareholders, Netflix

admitted that it has intentionally permitted extensive sharing of passwords outside of

users' homes, recognizing its role in attracting users to the platform. However,

considering the increased competition, Netflix expressed its desire for the numerous

households sharing passwords to transition towards paid subscriptions in order to

invest more in the company. In response, Netflix implemented a fee for additional

users in select countries in March 2022 to address account sharing and later in 2023 in

other countries.(Sherman, 2022)

Additionally, in July 2022, Netflix divulged a partnership with Microsoft to

introduce an advertising-supported subscription plan, expected to launch in 2023 in 12

different countries but with limited content availability compared to the ad-free

platform. This "Basic with Ads" plan was launched in November 2022, at a price of

$6,99 per month in the United States. In February 2023, Netflix reduced subscription

prices in over 30 countries to attract more subscribers and, at the same time,

implemented more stricter anti-password-sharing measures in several countries, but

allowing the possibility of an extra member with a payment of a fee.

Table 1 - Netflix subscription plans

Plan Features

Basic with Ads

Basic

Standard

Premium

Monthly Price (2023)

$6,99

$9,99

$15,49

$19,99

Resolution

720p HD

1080p HD

4K+HDR

Watch on Your Laptop, TV, Phone, and Tablet

Yes

Easy Change or Cancel

Yes

Downloads

Yes

Ads

Yes

Option to add members

Up to 1 member

Up to 2 members

Source: Netflix website

The streaming segment can also be divided into the domestic and international

segment. As can be seen in graphic 1, in 2023, the Domestic Streaming Segment

represented more than $14 billion in revenues, representing 44% of the revenues, with

80 million paid subscribers. Meanwhile, the International Streaming Segment

achieved around $18 billion in revenues with 180 million paid subscriptions in 2023.

This segment has become the focus of Netflix since it represents 56% of total revenues

and the market penetration is still in a growing stage in most countries.

Graphic 1- Netflix 2023 Segment Revenues %

Source: own presentation based on Netflix Annual Reports

As it is possible to analyze by the graphic 2, the DVD revenues are

insignificant, having been a small segment in recent years that has been decreasing in

value.

Graphic 2 - DVD segment Revenue (in thousands)

Source: own presentation based on Netflix Annual Report

Another important metric that should be analyze is the evolution of paid

memberships per segment over the last years. As presented by the graphic 3, it is

possible to conclude that Netflix has demonstrated a remarkable expansion of its

market presence in the international segment, solidifying its position as a leading

player in the global entertainment landscape.

44%

56%

Domestic Revenues International Revenues

$50 000

$100 000

$150 000

$200 000

$250 000

$300 000

$350 000

$400 000

2018 2019 2020 2021 2022 2023

Graphic 3 - Evolution of paid memberships at the end of period per segment (in thousands)

Source: own presentation based on Netflix Annual Reports

1.3 Key executives and key shareholders

Reed Hastings

Reed Hastings co-founded Netflix in 1997. After 25 years as a CEO, he became

an Executive Charmain of Netflix in 2023. In addition to his business pursuits,

Hastings has a strong background in educational philanthropy. From 2000 to 2004, he

was a member of the California State Board of Education. At the moment, he serves

on the boards of several educational institutions.

Dan Lin

Dan Lin reached a major professional milestone when he was appointed

Chairman of Netflix Film in April 2024. Before taking on this position, Lin made a

name for himself as the creator and CEO of Rideback, a prestigious entertainment firm

known for creating wildly popular live-action and animated films.

50 000

100 000

150 000

200 000

250 000

300 000

2018 2019 2020 2021 2022 2023

Paid memberships at end of period

Domestic Streaming Segment International Streaming Segment

Ted Sarandos

Ted Sarandos was named Co-CEO of Netflix in 2020. He has been in charge

for all content operations since 2000 and oversaw the company´s transition into

original content production which started in 2013 with the launch of series like “House

of Cards" and "Orange Is the New Black".

Greg Peters

Greg Peters assumed the role of co-CEO of Netflix in January 2023, being a

major turning point in his professional development at the organization. Prior to this

appointment, he served as Chief Operating Officer and Chief Product Officer, where

he played instrumental roles in shaping the product strategy. Before assuming these

key executive roles, Peters was International Development Officer for Netflix, where

he focused on expanding the company's global footprint and fostering strategic

partnerships.

In the annex D is possible to see the all the key executives of Netflix and their

role on the company. Moreover, the overview of the largest institutional shareholders

and mutual fund holders is presented in the annex E.

1.4 Historical stock performance

Graphic 4 - Netflix share price vs S&P 500 index (in $)

Source: own presentation based on Investing.com

To a better understanding of the evolution of the stock price of Netflix, I

computed the graphic 4, to compare the stock performance of Netflix with the changes

of the index S&P 500 from 2019 to first quarter of 2024.

Regarding the Netflix stock price, it followed an upward trend until the end of

2021, reached its highest value of $690,31 on 29th of October 2021 and then it

drastically fell reaching a value of 175,51$ on 17th of June 2022.

The period of 2020 to 2021, marked by a positive evolution of Netflix’s share

price, reflected the company's strong subscriber growth due to the covid-19 pandemic

and the high investment in original content.

In 2022, Netflix’s shares plummeted after the company recorded two

consecutive quarters of falling subscribers because of members canceling their

subscription due to the crackdown on password sharing.

100

200

300

400

500

600

700

800

01/02/2019 01/07/2020 01/11/2021 01/13/2022 01/20/2023 01/26/2024

Netflix share price vs S&P 500 index

Netflix S&P 500

During 2023, Netflix’s performance was remarkable since the company had a

substantially subscribers’ growth and rise its profitability in an increasingly

competitive market, driving up its share price.

More recently, after the company disclosure the financial results of the first

quarter of 2024 Netflix shares dropped from $610,56 to $555,04 in one day. Even

though Netflix reported better-than-expected revenue and earnings for the first quarter

as its subscriber growth surged, it also stated in the letter to shareholders that will stop

reporting quarterly membership numbers and average revenue per member starting in

2025. This decision has raised concerns among investors due to the lack of visibility

into key performance metric since subscriber additions have been watched by investors

to evaluate how companies like Netflix are faring in the streaming wars. (Netflix,

2024d)

In conclusion, over the last three years, Netflix's share price has experienced a

rollercoaster ride which demonstrated a wilder volatility and creates uncertainty for

what comes next.

Comparing the Netflix share price with the changes in the S&P 500 index,

Netflix overperformed the market, during 2020 and 2021. During this period, the

covid-19 pandemic negatively impacted different industries, but the streaming

industry was one of the few that managed to take advantage of this crisis. However,

with the downfall of Netflix share price in 2022, this has put Netflix in an

underperforming position in relation to the market. Lately, there has been a converging

trend in Netflix's share price in relation to changes in the S&P 500 index.

2 Industry Overview and Competitive Positioning

The following chapter present value insights of the media and entertainment

industry (M&E industry). In addition, it is present the current trends that are shaping

the M&E industry. The concepts of OTT market and VoD market are also mentioned

to better understanding of the market segments in which Netflix operates. Furthermore,

to assess Netflix's strategic positioning and growth prospects within the highly

competitive digital market it is present a brief introduction of industry peers and

strategic frameworks like Porter’s Five Forces and SWOT analysis.

2.1 Media and entertainment industry

In the last years, the media and entertainment industry (M&E industry) has

been subject to significant digital transformation by the rapid evolution of technology

and changing consumer behaviors, especially among younger generations.

According to Deloitte´s 2024 Digital Trends study, consumer expectations of

media and entertainment may now be shaped more by social media, content creators,

and video games than by TV and films. How people weigh the value of entertainment

options appears to be changing shape as well. (Deloitte, 2024)

2.1.1 Trends in M&E industry

Covid 19 impact

In 2020, the global pandemic impacted the media and entertainment industry,

as people were forced to stay home and use video entertainment. Coinciding with the

pandemic, was the emergence of new streaming video services, such as Disney+,

Apple TV+ and HBO Max, joining (and competing) with Netflix, Hulu, and Amazon.

Hence, stay-at-home viewers were able to watch premium TV and movies across

various screens and providers. While industry analysts had commented this trend was

already beginning, many agree the pandemic had sped up its pace. Therefore, COVID

19 can be seen as a trigger which drew consumers' attention to the various streaming

platforms. (Forbes, 2021)

Cord cutting trend

Cord-cutting refers to the cancellation of multichannel cable, satellite, and

other pay TV subscription services by television viewers. While this phenomenon

could be observed around the world for many years, the recent wave of technological

advancements and broadcast innovation such as over-the-top (OTT) media and

streaming services has accelerated the global cord-cutting trend. (Statista, 2023a) Cord

cutting is a strong trend in US, and in a study provided by Emarketer it is forecast that

by the end of 2027, US Traditional Pay TV Households will represent 34,9% of the

households. (Emarketer, 2024)

Generation Z

Gen Zs (those born between 1997 and 2009) and Millennials (those born

between 1983 and 1996), who collectively make up a significant share of the US

population, are more diverse than those in older generations, a trend that will continue

with Gen Alphas (those born between roughly 2010 and 2024). Millennials and

Generation Z are reshaping the M&E industry and they expected to see content that

represent their gender, race, community, and culture diversification ensuring the

industry is inclusive. (Deloitte, 2024)

Deloitte research found that Black, Hispanic and Latinx consumers, and

LGBTQIA+ audiences drive more than a third of the US M&E market. Besides that,

71% of entertainment spend among these groups is driven by feelings of inclusivity.

Investing in inclusivity could have real business implications for production

companies and streaming video-on-demand (SVOD) providers. (Deloitte, 2024)

Social Media and Creators

Social media platforms and media providers are competing for the consumer

attention in de M&E industry. Deloitte´s 2023 edition of Digital Media Trends show

that generation Zs and Millennials are focus into social media video content because

it is free and convenient, and they can endlessly scroll through new content that is

algorithmically target to their interests. In the 2024 Deloitte´s Digital Media trend

report it stated that almost half (47%) of Gen zs and a third of Millennials surveyed

say that their favorite form of video content is social media videos and live streams.

This highlights the effectiveness of social media in algorithms and the strength of

content creators and influencers. SVoD providers could benefit from studying how

social media services drive the engagement and retention. (Deloitte, 2024)

AI algorithm

The impact of AI into the M&E industry has been significant since many

companies are utilizing AI to improve their operations in order to improve customer´s

experience and create personalized content. AI algorithms can process and analyze

data from multiple sources, including social media, online reviews, and consumer

feedback, to gain insights into consumer behavior and preferences. Streaming services

use AI algorithms to suggest content to viewers based on their viewing history and

preferences. This leads to a more personalized viewing experience, which can increase

engagement and retention.

2.2 OTT Market

The Over-the-Top (OTT) Video refers to a digital media distribution model

where users can access and watch video content at their convenience, usually through

an online platform or service. (Statista, 2024c)

The revenue in the OTT Video market is projected to reach US$316,40bn in

2024. It is also expected that the revenue shows an annual growth rate (CAGR 2024-

2029) of 6,30%, resulting in a projected market volume of US $429,40bn by 2029.

(Statista, 2024c)

The substantial growth of the OTT Video market can be attributed to several

factors, including the diversification of content offerings, increasing popularity of live

streaming channels, advancements in technology, expanding demand in emerging

markets and heightened consumption in mature markets, particularly of video-

streaming services.

2.3 VoD Market

The Video on Demand (VoD) is one of the OTT subsets that compromises three

types of services: the Transactional Video on Demand (TVoD), the Advertising Video

on Demand (AVoD) and the Subscription Video on Demand (SVoD).

SVoD is a service model in which customers pay a monthly fee for unlimited

access to content for a specified period. Netflix operates within this market, which has

experienced significant growth in both revenue and user base.

SVoD will continue to be the main VoD’s source of revenues in 2024. Revenue in

the SVoD market is projected to reach US$108,50 bn in 2024 and it is expected to

show an annual growth rate (CAGR 2024-2029) of 7,46%, resulting in a projected

market volume of US$155,50bn by 2029. (Statista, 2024e)

2.4 Peers

Hulu

Hulu was launched in 2008 and it was one of the earliest streaming platforms

entering in the market as a competitor of Netflix. Recently, Hulu is own by Walt

Disney and offers a vast library of TV shows, movies and original content, similar to

Netflix. It is known for its partnerships with major TV networks, offering current-

season episodes of popular TV shows shortly after they were released. Additionally,

Hulu provides a variety of subscription options, including ad-supported and ad-free

plans. It also has several bundle options available, including access to live TV

streaming with its Hulu + Live TV subscription, as well as to Disney+ and ESPN+.

Is important to highlight that Hulu is only present in United States and, in the

last quarter of 2023, the Walt Disney Company reported that Hulu had 48,5 million

paid subscribers. (Statista, 2024b)

Amazon Prime Video

Amazon Prime Video, also known as Prime Video, is one of the major Netflix

competitors with original and licensed content as well. It was launched by Amazon in

United States, in 2006 and later, in 2016, Prime Video was launched worldwide

(excluding Iran, North Korea, Russia, Belarus, Syria, and Mainland China).

Nowadays, Prime Video have over 230 million subscribers worldwide, being most

Prime Video customers from the domestic market – 168 million US Amazon Prime

customers in 2023. (Mosby, 2024)

Amazon Prime Video’s pricing structure is a bit different from that of Netflix

since it can be offered as a standalone service or as part of Amazon's Prime

subscription. While Netflix is a standalone service, Amazon Prime Video is a service

available for Amazon Prime members at no additional cost. Besides that, it is also

possible to have an Amazon Prime Video subscription for customers that do not want

Amazon Prime membership.

Disney +

Disney +, own by The Walt Disney Company, was launched in 2019 and

quickly become a major player in the streaming industry. It is available in various

regions throughout North America, Latin America, Asia-Pacific and Europe and in the

last quarter of 2023, the number of worldwide Disney+ subscribers amounted to 150

million. (Statista, 2024a)

One of the key selling points of Disney+ is a vast library of Disney-owned

content movies and TV shows, as well as Star Wars, Marvel, Pixar and National

Geographic programming, but it only offers a limited selection of non-Disney content.

Disney+ is known for its family-friendly programming, making it a popular choice for

households with children.

Apple TV +

Apple Tv+ was launched in 2019 by the famous American multinational

technology company, Apple Inc. It can be accessed through Apple´s website and apple

devices, as well as non-Apple devices. Customers that buy a new apple device have

free access to Apple TV+ for 3 months. This initiative helps to attract a significant

number of users to the service. Another notable feature of Apple Tv+ is the possibility

of family sharing up to 6 members and an ad-free content. One of the disadvantages is

that its library includes mostly original content. Recently Apple added 50 licensed

movies to its library, but there are only available on US and for a limited time. Apple

TV+ is available in over 100 countries and regions around the world but with a

significant presence in US. Since Apple has never shared a the number of subscribers

for Apple TV+, recent studies amounted to an estimated 25 million Apple TV+ paid

subscribers in March 2022 and around 50 million users worldwide that access the

SVOD platform via promotions. (Statista, 2023b)

HBO Max

HBO Max was launched in 2020 by Warner Media Entertainment. The service

offers a vast library of content from HBO, Warner Bros, DC Comics, Cartoon Network

and many other media across a wide range of countries. When the service was first

launched as HBO Max, it succeeded both HBO Now (a previous HBO SVOD service)

and HBO Go (the TV Everywhere streaming platform for HBO pay television

subscribers). In the United States, existing subscribers of HBO Now and HBO pay

television subscribers were transferred to HBO Max at no additional charge.

Recently, HBO Max was relaunched as Max, as a video streaming platform

which has combined content from HBO and Discovery+ in May 2023. Owned by

Warner Bros. Discovery – a merger of Warner Media and Discovery, Inc. – the

combined number of subscribers to HBO, HBO Max, and Discovery+ peaked in the

fourth quarter of 2023 at over 98 million. (Statista, 2024f)

Paramount +

Paramount + was formerly known as CBS All Access that was launched in the

US in 2014 and initially offered content from the CBS network, including current and

past seasons of CBS shows, live TV streaming of local CBS stations and exclusive

original programming. Later, in 2021, the streaming service was relaunched as

Paramount + and it also expanded its library with contents of CBS Media Ventures,

CBS Studios, Paramount Media Networks and Paramount Pictures, while also

including original series and films and live streaming sports coverage.

Paramount + has a significant presence in the US and it also operates in

Australia, Austria, Canada, France, Switzerland, Germany, Ireland, Italy, Japan, Latin

America, United Kingdom, having over 67,5 million subscribers. (CNBC, 2024b)

Peacock

Peacock, own by NBCUniversal, was launched in 2020 and it offers mainly

content from NBCUniversal studios, licensed television series and films. In addition,

one of the major features of Peacock is that it offers live streaming of NBCUniversal's

networks, including NBC, CNBC, MSNBC and USA Network, allowing viewers to

watch live news, sports and events. The service also provides exclusive access to

Premier League soccer matches and other sports content. As an independent streaming

service, Peacock is only available in the United States, and it has reached 31 million

subscribers in 2023. (Statista, 2024d)

Recent news point to a possible partnership between Paramount+ and Peacock,

since both of them, while continuing to lose revenue, have had steady growth with

subscribers. This is seen as a possibility of offers subscribers a wide range of content

and their goal is to enhance their streaming capabilities at an affordable cost while

providing value and reducing churn.(Forbes, 2024)

In the graphic 5, it is possible to compare the number of paid subscribers, in

2023, of different streaming platforms.

Graphic 5 - Paid subscribers in 2023 per streaming (in billion)

Source: own presentation

100

150

200

250

300

Netflix Amazon

prime video

Disney + HBO Max Paramount + Hulu Peacock Apple TV +

(2022

estimated)

Paid subscribers in 2023

2.5 Porter’s 5 Forces

Porter´s five forces was a strategic analysis model introduce by Michael Porter

in his classic 1979 Harvard Business Review article. This model is a fundamental tool

to assess and determine competitiveness within the industry. The five forces are

competition rivalry, threat of new entrants to the industry, supplier bargaining power,

customer bargaining power and the ability of customers to find substitutes for the

sector's products.

Figure 2 - Five Forces of Porter

Source: Mindtools.com

Threat of New Entrants - Moderate

As we have seen in recent years, many streaming platforms emerged in the

streaming industry and quickly gained a strong competitive position. The trends

already mention can be seen as relevant factors that drove the growth of new

competitors. However, the market is becoming saturated and there is less chance of a

new competitor to enter into the market. Regarding the time and cost of entry, to have

a vast library with original and licensed content it requires substantial investment and

time. In a world increasingly ruled by technology, operating in the streaming sector

requires specialized knowledge of content acquisition, production, distribution and

technology. Despite the market saturation and high entry costs, new players may try

to emerge in streaming industry if they find a technology-based unique selling point

(USP).

Bargaining Suppliers Power - High

Streaming platforms depend on a diverse range of suppliers for content

acquisition, including production studios, distribution companies and individual

creators. Although there are a significant number of suppliers, only some of them have

high quality content. Besides that, major content suppliers hold significant power due

to their size and market dominance. Therefore, suppliers have the leverage to negotiate

favorable terms with streaming services, especially for premium or exclusive content.

Additionally, the growing number of streaming services competing for licensed

content can increase competition and drive-up prices. The cost of changing suppliers

can be high and time-consuming for Netflix streaming, since this can imply losing

access to popular content and consequently impact subscriber retention.

Bargaining Buyers Power (Customers) - High

The bargaining power of buyers in the streaming industry is high. Although

Netflix has the largest subscription base, customers have the option to choose from

various competitors in the streaming market. This availability of alternative streaming

services gives customers bargaining power, as they can easily switch to a different

platform if they are not satisfied with Netflix's offerings or pricing. In the context of

streaming services, the size of each order refers to the subscription fee paid by

customers. Some streaming platforms only have one subscription plan and others have

different types of subscriptions plans regarding the features provided. In the case of

Netflix, it has different levels of subscriptions plans, free and ad-supported, which

allow customers to choose based on their preferences and budget. Streaming services

are characterized by low switching costs, allowing customers to easily switch between

different platforms based on their content preferences. Besides that, in this sector,

customers tend to be price sensitive. Therefore, Netflix must continue to innovate and

adapt its offerings to meet customer expectations in order to retain its clients.

Threat of Substitution - High

The thread of substitution refers to alternative entertainment options compared

to Netflix. Others streaming platforms, traditional cable and satellite TV remain

alternatives, as well as other forms of entertainment such as video games, social media,

video-sharing websites (e.g., YouTube), live events and piracy are example of

substitutes. The availability of free or lower-cost alternatives increases the pressure on

Netflix to enhance customer experience and differentiate itself from competitors to

maintain and attract subscribers.

Competitive Rivalry - High

Competitive rivalry in the streaming industry is intense. Netflix operates in a

highly competitive market with numerous streaming service providers such as Hulu,

Amazon Prime Video, Disney +, Apple Tv +, HBO Max, Paramount +, Peacock and

others. One of the differences between them is the original content that can be seen as

a unique selling point (USP). Therefore, streaming services invest heavily in producing

original content, as this can be a determining factor in consumer choice. Apart from

content quality, streaming platforms may differentiate themselves through pricing

strategies, exclusive partnerships, the number of screens available and the possibility

of offer bundle packages or live sports streaming. Hence, to maintain its market

leadership position in the highly competitive streaming industry, Netflix must

continuously differentiate its offerings to maintain customer loyalty through original

content releases and diverse features.

2.6 SWOT Analysis

The SWOT analysis identifies strengths, weaknesses, opportunities and threats

that are used to evaluate a company's competitive position and to develop strategic

planning.

The following SWOT matrix helps to understand the Netflix overall position

within the streaming industry and it is present as a summary of chapter 2, highlighting

keywords.

Table 2 - SWOT Analysis

Strengths

Weaknesses

Brand reputation

Limited copyrights

Global market leadership

Content acquisition costs

Exponential growth

Lack of live TV programming

Original content

Lack of green initiatives

Opportunities

Threats

New content formats

Intense competition

Expansion into advertising

Content piracy

Partnerships and collaborations

Regulatory and Legal Risks

Technological advancements

Password sharing

Source: own presentation

3 Financial Analysis

The financial analysis was prepared based on publicly available annual reports

from 2018 to 2023. The balance sheet, income statement and regional information are

placed in the appendix of the thesis. The following chapter examine only selected parts

of the reported results and the evolution of some financial ratios.

3.1 Balance sheet analysis

The most significant portion of assets are content assets, which include licensed

content and produced content. The ratio of licensed and produced content had varied

over the last years as it is possible to see on the table 3. In 2018, the value of licensed

content was more than double of produced content.

Table 3 - Netflix Content assets, net

Content assets

2018

2019

2020

2021

2022

2023

Licensed content, net as % of

Total content

70%

60%

54%

45%

39%

40%

Produced content, net as a % of

Total Content

30%

40%

46%

55%

61%

60%

Source: own presentation based on Netflix Annual Reports

It is possible to see in the graphic 6 presented below, the company has shifted

their content strategy over the last years by producing more original content. In fact,

in the Q42023 call earnings, the Vice President of Finance, Spencer Wang, stated that

Netflix data clearly shows that original films outperform licensed films in terms of

viewers and viewed hours. In fact, it is what distinguishes Netflix from the

competition. In the most recent years, Netflix has as many licenses content as produced

content, offering a wide portfolio of quality content. Most of Netflix competitors are

more focus on producing original content as a unique selling point, but at the same

time they have lower licensed content. Therefore, Netflix believes it has reached the

optimal mix of content and plans to maintain this strategy. (Netflix, 2024a)

Graphic 6 - Evolution of Netflix Content Assets (in thousands of dollars)

Source: own presentation based on Netflix Annual Reports

Regarding the liabilities and equity of the company, it is interesting to study the

evolution of the debt (short-term debt and long-term debt) and equity over the last

years through the analysis of the graphic 7 presented below. Netflix equity has been

increasing over the years mainly due to the increase in retained earnings. Looking for

debt, Netflix has borrowed over $15 billion in the recent years to build out its content

library. However, in the last two years Netflix has made enough revenue to pay back

those loans while maintaining its immense content budget. Therefore, Netflix goals for

the next periods is to continuing anchoring gross debt to $10-$15 billion.

Graphic 7 - Evolution of Debt. vs Equity (in thousands of dollars)

Source: own presentation based on Netflix Annual Reports

5000 000

10000 000

15000 000

20000 000

25000 000

30000 000

35000 000

2018 2019 2020 2021 2022 2023

Content assets

Licensed content, net Produced content, net

5000 000

10000 000

15000 000

20000 000

25000 000

2018 2019 2020 2021 2022 2023

Debt vs Equity

Debt Equity

3.2 Income statement analysis

Regarding the income statement analysis, there are three important ratios (Gross

margin, EBIT margin and Profit margin) that should be analyzed to better understand

the financial performance of the company over the last years.

As can be seen in the table 4 presented below, while there were some fluctuations,

in the overall Netflix has shown a positive trend in terms of the evolution of the

mentioned ratios, which demonstrates Netflix’s ability to improve operational

efficiency and profitability over the last years.

In the year of 2021, Netflix experienced some of its best financial results and this

can be related to the Covid-19 pandemic. One of the key factors driving Netflix's

success in 2021 was the surge in subscriber numbers. During the pandemic, lockdowns

and social distancing measures led to an increase in demand for at-home entertainment

options. This influx of subscribers contributed to Netflix's revenue growth and

enhanced its financial performance in 2021.

Table 4 - Profitability Ratios

Profitability Ratios

2018

2019

2020

2021

2022

2023

Gross Margin

36,89%

38,28%

38,89%

41,64%

39,37%

41,54%

EBIT Margin

10,16%

12,92%

18,34%

20,86%

17,82%

20,62%

Profit Margin

7,67%

9,26%

11,05%

17,23%

14,21%

16,04%

Source: own presentation based on Netflix Annual Reports

3.3 Ratios Analysis

In the following section is computed the evolution of the profitability,

productivity, leverage, liquidity and market ratios over the last years of the company.

To provide a more complete analysis, some ratios were compared with the peers’

performance. However, since the main Netflix peers operate in different business

segments, that comparable analysis is not reliable in certain metrics.

Profitability ratios

Table 5 - Profitability Ratios

Profitability Ratios

2018

2019

2020

2021

2022

2023

Peers

2023

Return on Equity

23%

25%

32%

22%

26%

17%

Return on Assets

12%

14%

12%

14%

Return on Invested Capital

13%

14%

21%

22%

16%

22%

Source: own presentation based on Netflix Annual Reports and Refinitiv

Return on equity represents net profit returned to equity holders. In other

words, it shows shareholder’s income compared to their investment into the company.

Although there were some fluctuations over the last years, ROE has remained

relatively high which demonstrates that Netflix is improving profitability.

Return on assets ratio measures the profitability of the company’s assets, which

means, how effectively Netflix is utilizing its assets. Netflix's ROA had a positive

evolution over the last years indicating that Netflix had improved asset efficiency.

Return on invested capital measures how efficiently a company is using its

capital to generate profits. Overall, the Netflix’s ROIC has a positive trend over the

analyzed period, reflecting a good management of capital allocation.

In 2021, Netflix had a strong financial performance, marked by high

profitability ratios, which can be related with the covid-19 pandemic. The surge in

demand for at-home entertainment during the pandemic, driven by lockdowns and

social distancing measures, attracted new subscribers and significantly bolstered

Netflix's revenue. However, in the year of 2023 the company also achieve good

financial results, demonstrating that the company ability to quickly improve its

performance.

Considering this, and when analyzing overall profitability in 2023, Netflix

outperformed its peers on all three profitability measures considered. Nevertheless, the

reliability of this comparison falls deeply on the statement already mentioned above

that Netflix’s peers also operate in other segments, therefore the comparison can be

biased.

Productivity Ratios

Table 6 - Productivity Ratios

Productivity Ratios

2018

2019

2020

2021

2022

2023

Peers

2023

Average Collection Period

Average Payment Period

192

149

122

108

Average Inventory Holding Period

Cash Conversion Cycle

-184

-141

-113

-98

-87

-83

-26

Total Asset Turnover

0,61

0,59

0,64

0,67

0,65

0,69

Source: own presentation based on Netflix Annual Reports and Refinitiv

Over the last years, Netflix had increased the ACP, the number of days it takes

for Netflix to collect payments from its clients, and had decreased the APP, number of

days it takes for Netflix to pay its suppliers. Therefore, the CCC had evolute for -184

days to -83 days. The lower the CCC, the better for the company, as it indicates

efficiency in working capital management and liquidity. Although Netflix’s CCC had

increase during the last years, the company still present a reasonable value in 2023.

The asset turnover ratio measures the efficiency of a company's assets in

generating revenues. Although Netflix has shown some fluctuations, overall, it has

shown an upward trend over the last few years.

Regarding the overall productivity analysis Netflix surpasses its competitors,

as evidenced, for example by the CCC of -83 compared to the -26 of the peers. Once

again it is important to note that this type of direct comparison can be biased due to

the positioning of the peers in other segments.

Leverage Ratios

Table 7 - Leverage Ratios

Leverage Ratios

2018

2019

2020

2021

2022

2023

Peers

2023

Total Debt Ratio

0,40

0,43

0,42

0,35

0,30

0,44

Net Debt to EBIT

4,09

3,74

1,77

1,51

1,47

1,06

Debt to equity ratio

1,98

1,95

1,47

0,97

0,69

0,71

0,63

Interest Coverage

3,82

4,16

5,97

8,09

7,98

9,94

5,11

Source: own presentation based on Netflix Annual Reports and Refinitiv

The Total Debt Ratio measures the proportion of a company's total assets

financed by debt. The lower ratio, the lower financial risk. Netflix's Total Debt Ratio

had decreased from 2018 to 2023, which suggests that Netflix reduced its reliance on

debt financing over the years, improving its financial stability.

The Net Debt to EBIT ratio measures the company's ability to repay its debt.

A lower ratio indicates a better management of debt. Netflix's Net Debt to EBIT ratio

decreased substantially in the last years, showing that Netflix has higher the probability

of paying and refinancing its debt.

The Debt-to-Equity ratio indicates the proportion of financing provided by debt

relative to equity. This ratio had decreased over the analyzed period, suggesting a

decreasing reliance on debt financing and a strengthening of the company's equity

position mainly due to accumulation of retained earnings and to anchoring gross debt

to $10-$15 billion.

The Interest Coverage ratio indicates the company´s ability to pay its interest

expenses on outstanding debt. A higher ratio suggests that the company is more

capable of meeting its interest obligations, which indicates a lower financial risk for

the company. Overall, the ratio has increased over the years, reflecting improvement

of its financial position.

In summary, the analysis of Netflix's leverage ratios indicates a consistent trend

of decreasing leverage and improved financial stability over the years. Considering the

year 2023, the overall leverage position of Netflix outperforms its peers.

Liquidity Ratios

Table 8 - Liquidity Ratios

Liquidity Ratios

2018

2019

2020

2021

2022

2023

Peers

2023

Current ratio

1,49

0,90

1,25

0,95

1,17

1,12

0,99

Quick ratio

0,67

0,87

1,22

0,91

1,12

1,07

Cash ratio

0,58

0,73

1,05

0,71

0,76

0,81

Source: own presentation based on Netflix Annual Reports and Refinitiv

The current ratio measures the company's ability to meet short-term obligations

with its current assets. Meanwhile, the quick ratio measures a company's ability to

quickly convert liquid assets into cash to pay for its short-term financial obligations.

Regarding the cash ratio, it measures the company's ability to cover its short-term

obligations using only its most liquid assets, specifically cash, cash equivalents, and

short-term investments.

The higher the liquidity ratios, better for the company since it indicates that a

company has sufficient liquidity to meet its short-term financial obligations without

facing liquidity constraints or financial distress.

Netflix’s liquidity ratios show some fluctuations in its liquidity position over the

years, but overall Netflix had increased its liquidity position from 2018 to 2023.

However, as a streaming company operating on a subscription model, which provides

a steady stream of cash inflows, and also having a lower CCC, this reduces the need

for a high liquidity. Therefore, the liquidity ratios are not relevant metric in this

industry. Nevertheless, when compared to its peers, Netflix shows a slight higher

current ratio in the year 2023.

Market Ratios

Table 9- Market Ratios

Source: own presentation based on Netflix Annual Reports

The Earnings per Share ratio is a measure of a company's profitability,

calculated by dividing net income by the number of outstanding shares. Overall, the

EPS of Netflix followed an increasing trend suggesting that Netflix's had improved its

profitability over the years.

The Price Earnings Ratio is calculated by dividing the market price per share

by earnings per share and it indicates how much investors are willing to pay per dollar

of earnings, reflecting the company’s earnings potential. A decreasing PER trend may

indicate that a company’s stock price is falling relative to its earnings, which may

suggest the stock is becoming more attractively priced if earnings are stable or

increasing.

Market Ratios

2018

2019

2020

2021

2022

2023

Earnings per

2,77

4,25

6,23

11,52

10,09

12,50

Price Earnings

Ratio

88,81

77,35

82,43

52,28

29,24

38,96

Market

Capitalization

107 573 528

144 406 880

227 634 877

267 461 134

131 323 857

210 701 986

Market capitalization reflects the total value that the market assigns to the

company. Although some fluctuations, this value had increased from 2018 to 2023

which may indicate company growth.

Summary of Financial Analysis

Upon examining the profitability, productivity, leverage, liquidity, and market

ratios, it can be concluded that Netflix has demonstrated a steady rise in profitability

throughout the period under review. Additionally, there has been a persistent decline

in leverage ratios, indicating a reduced dependency on debt financing and an

improvement in financial stability and flexibility. Netflix has also displayed favorable

trends in productivity metrics and maintained sufficient liquidity ratios. Thus, the

company’s capacity to adjust to evolving market dynamics, capitalize on opportunities

and sustain investor trust suggests a promising trajectory for ongoing expansion and

prosperity in the streaming industry.

4 Valuation

In this chapter, it will be computed the expected target price of Netflix through

two valuations methods, the Discounted Cash Flow valuation and the Relative

valuation, that offer complementary perspectives on the intrinsic value of the

company. By combining these two valuation methods, investors can gain a

comprehensive understanding of Netflix's valuation and make informed investment

decisions. The chapter will provide a detailed analysis of the assumptions,

methodologies, and key findings of each valuation approach, ultimately culminating

in the determination of the expected target price for Netflix.

4.1 DCF valuation

The most widely used models among a variety of business valuation approaches

are the discounted cash flow models (DCF) namely the method of free cash flow to

firm (FCFF) and free cash flow to equity (FCFE). The choice of these methods by

investment analysts and corporate finance professionals is evident, as these methods

closely align with investor and stakeholder expectations regarding the company’s

profitability and growth potential. Moreover, DCF models incorporate the time factor,

providing strategic insights for potential investors and current shareholders to base

their decisions on the company’s further development. Another notable benefit of DCF

models is their comprehensive nature, which involves an in-depth examination of the

company’s operational, financial, and investment activities, analysis of financial

statements, market research, and other factors that influence the company’s trajectory

that are further reflected in the generated cash flows. (Bilych, 2013)

DCF valuation can be performed using two different cash flow metrics: Free Cash

Flow to the Firm (FCFF), which represents cash available to both debt and equity

holders, and Free Cash Flow to Equity (FCFE), which represents cash available solely

to equity holders. For FCFF-based valuation, all inputs must be based on accounting

figures calculated prior to any interest payments to debt holders. Meanwhile, FCFE-

based valuation uses figures from which interest payments have already been

deducted. Utilizing FCFF leads to the determination of the company’s enterprise value,

whereas FCFE analysis provides the company’s equity value. Given that an acquirer

typically assumes all of a company’s obligations, including both debt and equity,

FCFF is generally considered more applicable than the equity-based approach.

(Steiger, 2010)

Hence, for this DCF analysis, the FCFF will serve as the cash-flow metric and in

that sense, I will establish the value drivers necessary to compute the FCFF. The value

drivers for Netflix’s revenue projections are the subscription base and the Average

Revenue Per User (ARPU). The subscription base refers to the number of individuals

that are currently using Netflix’s services and ARPU, on the other hand, is a measure

of the revenue generated per user.

One factor incorporated into my assumptions is the competitive landscape

Netflix operates within. After reviewing various industry reports, it is possible to

conclude that the likelihood of new competitors to enter the streaming market is low,

as it is becoming increasingly saturated. This assumption allows for a projection in

which Netflix continues to focus on maintaining its market leadership in the

subscription base, taking advantage of its established brand and its extensive library

of content. In this sense, my subscriber growth forecast will be based on Netflix's

strategic intention to maintain its position as a leader in the sector, reflecting its

historical success in maintaining a substantial subscriber base.

Moreover, my projections also incorporate macroeconomic indicators such as

inflation. For instance, lower inflation typically has a positive impact on purchasing

power, as it means that the general level of prices for goods and services is rising at a

slower rate. This allows consumers to buy more with their currency, as the value of

the currency remains relatively stable or even increases.

The IMF anticipates a global inflation decrease from 6.8% in 2023 to 3.4% in

2028, as can be seen in the table 54 present further in the page 80.

First of all, it is important to highlight that historically, lower inflation rates are

correlated with less cautious spending behavior among consumers. With less pressure

from the cost of necessities, consumers might be more inclined to spend on non-

essential items, such as streaming services. For Netflix, this could translate to a lower

churn rate, as subscribers are less likely to cancel their service due to financial

constraints.

Besides that, as inflation decreases, the purchasing power of consumers

generally rises, making subscriptions more affordable. Consequently, there may be an

increased likelihood of consumers subscribing to services like Netflix, as they perceive

greater value in entertainment expenditures relative to other goods and services with

less rapidly increasing prices.

Overall, the projected decrease in inflation could lead to positive outcomes for

Netflix, with potential increases in subscriber growth and retention, as well as creating

more advantageous conditions for international market expansion and pricing

strategies. Therefore, for a more detailed analysis, these projections will be adjusted

by company-specific factors such as ARP and average number of subscribers per

region, which will be the main value drivers of my analysis.

4.1.1 Income statement projection

Membership Forecast

To be able to estimate the sales projection, the first important step is to estimate

the average paying memberships per region. As it is possible to see in the table 10

presented below, the number of subscribers had increased from 2018 to 2023.

Despite the entry into the market of strong competitors such as Disney+, Apple

TV+, and HBO Max during 2019 and 2020, the lockdown of Covid-19 during 2020

and 2021 had a significant impact on the increase in the number of Netflix subscribers,

which covered the potential losses of subscriptions that new competitors could cause.

During 2022, there was little growth in the number of subscribers and in the US

and Canada there was even a loss. That happened, because in that year Netflix

estimated that approximately 100 000 thousand households globally were engaging in

password sharing, with more than 30 000 thousand of those in the US and Canada.

Therefore, Netflix started to crack down on password sharing, specifically the sharing

of passwords with people who do not live in the same household. This measure was

not well accepted by the Netflix community and some members canceled their

membership. Netflix quickly came up with a solution, allowing a member outside the

household to join for a low extra fee. This paid sharing initiatives have the goal to

unlock membership upside. To attract new members, Netflix also introduced a

subscription model with ads at a low price ($6,99) in 12 countries (Australia, Brazil,

Canada, France, Germany, Italy, Japan, Korea, Mexico, Spain, United States and

United Kingdom).

Table 10 - Average Paying memberships – historical values

Average Paying memberships

(in thousands)

2018

2019

2020

2021

2022

2023

United States and Canada (UCAN)

61 845

66 615

71 689

74 234

74 001

76 126

Annual subscription growth

7,7%

7,6%

3,6%

-0,3%

2,9%

Europe, Middle East and Africa (EMEA)

31 601

44 731

60 425

69 518

73 904

80 928

Annual subscription growth

41,5%

35,1%

15,0%

6,3%

9,5%

Latin America (LATAM)

22 767

28 391

35 297

38 573

40 000

42 802

Annual subscription growth

24,7%

24,3%

9,3%

3,7%

7,0%

Asia-Pacific (APAC)

8 446

13 247

21 674

28 461

35 019

41 033

Annual subscription growth

56,8%

63,6%

31,3%

23,0%

17,2%

Source: own presentation based on Netflix Annual Reports

After analyzing the historical values of Netflix subscribers, it is important to

look forward on Netflix expected achievements.

In a video interview for investors of the 2023Q4, co-CEO Theodore Sarandos

talked about the new partnership with WWE Raw (World Wrestling Entertainment).

In the beginning of 2025, Netflix will be able to stream “Raw” globally and will start

the agreement with exclusive rights to it in the US, Canada, UK and Latin America.

With the addition of “Raw” to its programming lineup, which currently airs on US

Network and produces three hours of live programming per week year-round, the

Netflix platform will be boosted, and a significant historical shift will be achieved.

(Netflix, 2024a)

During the interview, a question was asked to co-CEO Gregory Peters related

to the Netflix competitive landscape and he stated that there is “room for multiple

players” and Netflix will continue to create entertainment value to engage audience –

“more entertainment value delivered is the key priority for us”. The CFO Spencer

Neumann also reinforced that they also will continually invest in content. (Netflix,

2024a)

Moreover, the co-CEO Gregory Peters said that the ad-supported offering has

23 000 thousand monthly active users at the end of the Q42023 and that Netflix’s

priority for it is scale. He also said that one of the Netflix priorities is to make the ads

plan more attractive by adding features such as additional streams, higher resolution,

and the ability to download content, while other priorities include growing the

technical advertising features and growing their go-to-market capabilities. Besides

that, Netflix is continually trying to drive revenue by cutting down on subscription

sharing and pushing viewers toward its ad-tier membership. That will continue to

improve Netflix growth for years ahead, not just 2024, as stated by Gregory Peters.

(Netflix, 2024a)

Recently, Netflix has discontinued the basic plan in US, Canada and UK which

leaves members with 3 options, encouraging them to take the ads plan. In US, clients

have the standard with ads plan at $6,99/month, the standard plan at $15,49/month and

the premium plan at $22,99/month. In a video interview for investors of the 2024Q1,

co-CEO Greg Peters stated that Netflix plans to retire their basic plan in some of their

ads countries but wants a smooth transition. (Netflix, 2024b)

Netflix said in a letter to shareholders of Q32023 that 30% of sign-ups in the

ads countries are, on average, to their ads plan. Since there was no detailed information

on the annual reports of number of subscribers to the ads plan in each region, in order

to simplify the forecast of the average paying memberships with the ads plan, I only

considered the US and Canada region. In this sense, 30% of new subscribers in the US

and Canada will be allocated to the plan with adds and the remaining 70% to the

standard and premium plans. (Netflix, 2023c)

In the US and Canada region, I assume an annual subscription growth of 3,6%,

the same growth of 2021, since the WWE agreement and the ads-subscription model

are determining factors that put subscriber growth at the same levels as before the

password sharing controversy.

In the other three regions, Europe, Middle East and Africa, Latin America and

Asia-Pacific, I assume an annual subscription growth of 9,5%, 7,0% and 17,2%,

respectively. These annual subscription growths are the same of the 2023 annual

subscription growth based on engagement of the Netflix members in that regions and

will be driven by the entertainment value added.

The forecast of the average paying memberships per region is present in the

table 11.

Table 11 - Average Paying memberships – projected values

Source: own presentation

Average Paying memberships

(in thousands)

F2024

F2025

F2026

F2027

F2028

United States and Canada (UCAN)

78 829

81 627

84 525

87 525

90 633

Annual subscription growth

3,6%

US and Canada – Free ads plans

55 180

57 139

59 167

61 268

63 443

Us and Canada - Ads plan

23 649

24 488

25 357

26 258

27 190

Europe, Middle East and Africa (EMEA)

88 620

97 042

106 265

116 365

127 425

Annual subscription growth

9,5%

Latin America (LATAM)

45 800

49 009

52 442

56 115

60 046

Annual subscription growth

7,0%

Asia-Pacific (APAC)

48 080

56 337

66 012

77 348

90 632

Annual subscription growth

17,2%

The evolution of the average paying memberships from 2018 until 2028 can be

seen by analyzing the graphic 8:

Graphic 8 - Evolution of average paying memberships (in thousands)

Source: own presentation based on Netflix Annual Reports

Average Revenue per User Forecast

Netflix is continually adjusting its prices according to the quality of it service and

content. Therefore, to estimate the average revenue per user (ARPU), which represents

the monthly price paid by each subscriber, I calculated a compounded annual growth

rate (CAGR) from 2018 to 2023 prices, as it is shown in table 12.

Table 12 - Average Revenue per User - historical values

Source: own presentation based on Netflix Annual Reports

20 000

40 000

60 000

80 000

100 000

120 000

140 000

2018 2019 2020 2021 2022 2023 F2024 F2025 F2026 F2027 F2028

United States and Canada (UCAN) Europe, Middle East and Africa (EMEA)

Latin America (LATAM) Asia-Pacific (APAC)

Average Revenues per user (in $)

2018

2019

2020

2021

2022

2023

CAGR

United States and Canada (UCAN)

11,16

12,57

13,32

14,56

15,86

16,28

7,8 %

Europe, Middle East and Africa

(EMEA)

10,45

10,33

10,72

11,63

10,99

10,87

0,8%

Latin America (LATAM)

8,19

8,21

7,45

7,73

8,48

8,66

1,1%

Asia-Pacific (APAC)

9,33

9,24

9,12

9,56

8,50

7,64

-3,9%

By applying the CAGR, I reach the ARPU of the forecast years. However, in the

US and Canada Region I assume that from 2026 to 2028 the ARPU will stop increasing

in 2026 and the ARPU will stay between the standard plan price and the premium plan

price from 2026 to 2028. For the ads plan price, I assume a constant value of $6,99

since the company's intention is to attract new customers to the new subscription

model. Regarding the Asia-Pacific region, which is a region where Netflix is gradually

increasing its penetration rate, I assume that from 2026 and 2028 the ARPU will stop

decreasing in 2026 and I assume a constant price between 2026 and 2028.

Table 13 present the aforementioned assumptions.

Table 13 - Average Revenue per User - projected values

Average Revenues per user

(in $)

F2024

F2025

F2026

F2027

F2028

US and Canada - standard and

premium members

17,6

18,9

20,4

Us and Canada - Ads members

6,99

Europe, Middle East and Africa

(EMEA)

10,96

11,04

11,13

11,22

11,31

Latin America (LATAM)

8,76

8,86

8,95

9,06

9,16

Asia-Pacific (APAC)

7,34

7,05

6,78

Source: own presentation

Revenues Forecast

After computing the average paying memberships and the average revenues per

user it is possible to calculate the revenues forecast by multiplying the ARPU per 12

months, multiplied by the average paying memberships. By adding up the revenues of

all the regions, it is possible to get the total revenues, as presented by table 14.

Table 14 - Revenues forecast

Revenues ($ in thousands)

F2024

F2025

F2026

F2027

F2028

US and Canada - standard and

premium members

11 625 592

12 982 653

14 498 125

15 012 817

15 545 780

Us and Canada - Ads members

1 983 641

2 054 061

2 126 981

2 202 491

2 280 680

Europe, Middle East and Africa

(EMEA)

11 650 998

12 859 279

14 192 867

15 664 757

17 289 290

Latin America (LATAM)

4 812 980

5 207 928

5 635 284

6 097 709

6 598 080

Asia-Pacific (APAC)

4 235 257

4 768 169

5 368 136

6 290 034

7 370 256

TOTAL REVENUES

34 308 467

37 872 090

41 821 394

45 267 807

49 084 086

Source: own presentation

Ads Revenues

So far Netflix's ads revenues are being immaterial, therefore they are not

presented in the financial statements. However, this immateriality will not last much

longer, since management expects that it will have a substantial contribution to the

financial statements by next year.

As stated in the letters to shareholders of Q42023 the Netflix goal is to make

ads a more substantial revenue stream that contributes to sustained and healthy revenue

growth in 2025 and beyond. (Netflix, 2024c)

Besides that, during the company's Q42022 earnings call Netflix, the CFO

Spencer Neumann provided some commentary on just how big he thinks the

company's advertising can be long term. He noted that the company would not dabble

in advertising if it did not believe the revenue stream from ads could grow to 10% or

more of its subscription revenue. (Netflix, 2023b)

Also, Netflix expects its ad business to be equal to or bigger than streaming

rival Hulu LLC's ad business in the years to come, as Neumann said. (approximately

around $3-$5billion)

Therefore, to forecast the Ads revenues, I estimated a gradual growth, so that

ad revenues will represent 10% of subscription revenues in the last year of the forecast,

as illustrated in the table 15.

Table 15 - Ads Revenues forecast

Revenues ($ in thousands)

F2024

F2025

F2026

F2027

F2028

Subscription Revenues

34 308 467

37 872 090

41 821 394

45 267 807

49 084 086

Ads Revenues as % of

Subscription Revenues

10%

Ads Revenues

686 169

1 514 884

2 509 284

3 621 425

4 908 409

Source: own presentation

Cost of Revenues Forecast

The amortization of content assets makes up the majority of cost of revenues.

Therefore, in order to forecast the cost of revenues, I calculated the Cost of revenues

as a percentage of the Amortization of content assets, as presented by table 16.

Table 16 - Cost of revenues - historical values

Costs of revenue

schedule

($ in thousands)

2018

2019

2020

2021

2022

2023

Cost of revenues

(9 967 538)

(12 440 213)

(15 276 319)

(17 332 683)

(19 168 285)

(19 715 368)

Amortization of

content

(7 532 088)

(9 216 247)

(10 806 912)

(12 230 367)

(14 026 132)

(14 197 437)

Costs of revenues as a

% of Amortization of

Content

132%

135%

141%

142%

137%

139%

Source: own presentation based on Netflix Annual Reports

After that, I use the proportion value from 2023 and I calculated the cost of

revenues being 139% of the amortization of content assets.

The table 17 present the forecast values of the costs of revenues.

Table 17 - Cost of revenues - projected values

Costs of revenue schedule

($ in thousands)

F2024

F2025

F2026

F2027

F2028

Cost of revenues

(19 065 757)

(18 834 966)

(19 539 148)

(20 863 175)

(22 420 412)

Amortization of content

(13 729 639)

(13 563 442)

(14 070 537)

(15 023 996)

(16 145 394)

Costs of revenues as a % of

Amortization of Content

139%

Source: own presentation

Marketing, Technology and Development and General and Administrative

Forecast

Marketing, Technology and Development and General and Administrative

expenses were calculated as a percentage of revenues. After analyzing the historical

years, I computed the table 18.

Table 18 - Operating Expenses - historical values

Source: own presentation based on Netflix Annual Reports

In the letter to shareholders from the Q42023, Netflix stated that it will deepen

their connection with fans through marketing, consumer products and innovative new

live experiences. Therefore, in the forecast years I assumed that Marketing and

Technology and Development will be calculated as 9% of revenues, since the company

will invest more in those areas. Regarding the general and administrative expenses, it

will be calculated as 5% of revenues as it was in the last three years. (Netflix, 2024c)

Expenses schedule

($ in thousands)

2018

2019

2020

2021

2022

2023

Revenues

15 794 341

20 156 447

24 996 056

29 697 844

31 615 550

33 723 297

Marketing

(2 369 469)

(2 652 462)

(2 228 362)

(2 545 146)

(2 530 502)

(2 657 883)

% of Total revenues

15%

13%

Technology and development

(1 221 814)

(1 545 149)

(1 829 600)

(2 273 885)

(2 711 041)

(2 675 758)

% of Total revenues

General and administrative

(630 294)

(914 369)

(1 076 486)

(1 351 621)

(1 572 891)

(1 720 285)

% of Total revenues

The assumptions above mentioned can be seen in the table 19.

Table 19 - Operating Expenses - projected values

Source: own presentation

Interest expenses forecast

Interest expenses are calculated by multiplying the interest expense rate by the

debt of the previous period. After reaching the value of the interest expense rate used

in the historical years, I decided to use an interest expense rate of 5% in the forecast

years, as can been seen in tables 20 and 21.

Table 20 - Interest expenses - historical values

Source: own presentation based on Netflix Annual Reports

Expenses schedule

($ in thousands)

F2024

F2025

F2026

F2027

F2028

Revenues

34 308 467

37 872 090

41 821 394

45 267 807

49 084 086

Ads Revenues

686 169

1 514 884

2 509 284

3 621 425

4 908 409

Marketing

(3 149 517)

(3 544 828)

(3 989 761)

(4 400 031)

(4 859 324)

% of Total revenues

Technology and development

(3 149 517)

(3 544 828)

(3 989 761)

(4 400 031)

(4 859 324)

% of Total revenues

General and administrative

(1 785 138)

(2 009 199)

(2 261 386)

(2 493 926)

(2 754 253)

% of Total revenues

Interest expenses schedule

($ in thousands)

2018

2019

2020

2021

2022

2023

Interest expense

(420 493)

(626 023)

(767 499)

(765 620)

(706 212)

(699 826)

Debt

10 360 058

14 759 260

16 308 973

15 392 895

14 353 076

14 543 261

Interest expense rate

Table 21 - Interest expenses - projected values

Source: own presentation

Income taxes forecast

Regarding the income taxes, first I calculated what was the tax rate used in the

historical periods by dividing the income taxes by EBT. Netflix does not use the

effective tax rate of US country since it has some tax benefits. Therefore, I used the

average of the tax rate from 2020 to 2023, that is 13,4%, in the calculation of the

income taxes of the forecast years. Those calculations are presented in the tables 22

and 23.

Table 22 - Income taxes - historical values

Source: own presentation based on Netflix Annual Reports

Table 23 - Income taxes - projected values

Source: own presentation

Interest expenses schedule

($ in thousands)

2023

F2024

F2025

F2026

F2027

F2028

Interest expense

(727 163)

(734 235)

(741 377)

(748 591)

(755 877)

Debt

14 543 261

14 684 695

14 827 544

14 971 821

15 117 540

15 264 717

Interest expense rate

Income taxes schedule

($ in thousands)

2018

2019

2020

2021

2022

2023

EBT

1 226 458

2 062 231

3 199 349

5 840 103

5 263 929

6 205 405

Income Taxes

(15 216)

(195 315)

(437 954)

(723 875)

(772 005)

(797 415)

Tax rate

1,2%

9,5%

13,7%

12,4%

14,7%

12,9%

Income taxes schedule

($ in housands)

F2024

F2025

F2026

F2027

F2028

EBT

7 068 771

10 670 146

13 760 472

15 934 706

18 294 531

Income Taxes

(947 216)

(1 429 800)

(1 843 904)

(2 135 252)

(2 451 468)

Tax rate

13,4%

Interest and other income (expense) forecast

Interest and other income (expense) consists primarily of foreign exchange gains

and losses on foreign currency denominated balances and interest earned on cash, cash

equivalents and short-term investments. (Netflix, 2023a)

Due to the nature of this expense, it is extremely difficult to project since it has

varied a lot over the last few years. Therefore, I use the value of 2023 as a constant

value for all the forecast years.

Considering all the assumptions mentioned and once the value drivers have been

projected, it is possible to compute the Income Statement for the forecast years, as

presented in table 24.

Table 24 - Income Statement forecast

Source: own presentation

Income Statement

Forecast

($ in thousands)

F2024

F2025

F2026

F2027

F2028

Subscription Revenues

34 308 467

37 872 090

41 821 394

45 267 807

49 084 086

Ad revenues

686 169

1 514 884

2 509 284

3 621 425

4 908 409

Cost of revenues

(19 065 757)

(18 834 966)

(19 539 148)

(20 863 175)

(22 420 412)

Marketing

(3 149 517)

(3 544 828)

(3 989 761)

(4 400 031)

(4 859 324)

Technology and

development

(3 149 517)

(3 544 828)

(3 989 761)

(4 400 031)

(4 859 324)

General and

administrative

(1 785 138)

(2 009 199)

(2 261 386)

(2 493 926)

(2 754 253)

Operating Income/EBIT

7 844 706

11 453 153

14 550 621

16 732 069

19 099 180

Interest expenses

(727 163)

(734 235)

(741 377)

(748 591)

(755 877)

Interest and other income

(48 772)

EBT

7 068 771

10 670 146

13 760 472

15 934 706

18 294 531

Income Taxes

(947 216)

(1 429 800)

(1 843 904)

(2 135 252)

(2 451 468)

Net income

6 121 556

9 240 346

11 916 568

13 799 454

15 843 063

The graphic 9 shows an increasing trend of the Revenues, EBIT and Net income over the

years.

Graphic 9 - Revenues vs EBIT vs Net Income

Source: own presentation based on Netflix Annual Report

4.1.2 Balance sheet projection

Content assets forecast

Content assets of Netflix are licensed and original produced content. As stated

by the co-CEO Theodore Sarandos in the Q42023 earnings call, Netflix has a healthy

mix between originals and licensed titles, and they will continue to drive the business

in the same way.(Netflix, 2024a)

Content assets(net) of a given period are equal to the content assets(net) of the

previous period plus additions to content less amortization of content, as can be seen

in the table 25.

10000 000

20000 000

30000 000

40000 000

50000 000

60000 000

2018 2019 2020 2021 2022 2023 F2024 F2025 F2026 F2027 F2028

Revenues vs. EBIT vs. Net Income

Revenues Operating Income/EBIT Net income

Table 25 - Content assets, net - historical values

Source: own presentation based on Netflix Annual Reports

Considering that additions to content can be calculated as a percentage of

subscription revenues and the amortization of content can be calculated as a percentage

of the opening balance of the content assets, I computed those percentages of the

historical years.

Since Netflix will continually invest in content, I used the values of percentages

from 2023 to forecast the additions and amortizations of content in the forecast years.

Calculations were computed and presented in the table 26.

Table 26 - Content assets, net - projected values

Source: own presentation

Content assets, net

schedule ($ in thousands)

2018

2019

2020

2021

2022

2023

Beginning of content

20 102 327

24 504 567

25 383 950

30 919 539

32 736 713

Additions to content

13 618 487

11 686 295

17 765 956

15 843 306

13 118 780

Amortization

(9 216 247)

(10 806 912)

(12 230 367)

(14 026 132)

(14 197 437)

Ending of content

20 102 327

24 504 567

25 383 950

30 919 539

32 736 713

31 658 056

Additions to content as %

of Subscription Revenues

67,6%

46,8%

59,8%

50,1%

38,9%

Amortization as % of

opening content

-45,8%

-44,1%

-48,2%

-45,4%

-43,4%

Content assets, net

schedule

($ in thousands)

F2024

F2025

F2026

F2027

F2028

Beginning of content

31 658 056

31 274 835

32 444 105

34 642 608

37 228 349

Additions to content

13 346 418

14 732 712

16 269 040

17 609 737

19 094 317

Amortization

(13 729 639)

(13 563 442)

(14 070 537)

(15 023 996)

(16 145 394)

Ending of content

31 274 835

32 444 105

34 642 608

37 228 349

40 177 272

Additions to content as %

of Subscription Revenue

38,9%

Amortization as % of

opening content

-43,4%

Property and equipment forecast

Property and equipment(net) of a given period are equal to the property and

equipment(net) of the previous period plus capex less depreciations, as can be seen in

the table 27.

Table 27 - Property and Equipment, net - historical values

Property and

equipment, net schedule

($ in thousands)

2018

2019

2020

2021

2022

2023

Beginning PP&E

418 281

565 221

960 183

1 323 453

1 398 257

Capex

250 519

510 672

571 682

411 486

450 134

Depreciation

(103 579)

(115 710)

(208 412)

(336 682)

(356 947)

Ending PP&E

418 281

565 221

960 183

1 323 453

1 398 257

1 491 444

Capex as % of Total

Revenue

1,2%

2,0%

1,9%

1,3%

Depreciation as % of

Opening PP&E

-24,8%

-20,5%

-21,7%

-25,4%

-25,5%

Source: own presentation based on Netflix Annual Reports

Using the same logic of above, capex can be calculated as a percentage of total

revenues and depreciation can be calculated as a percentage of the opening balance of

the property and equipment, then I computed those percentages of the historical years.

Once there is no indication of Netflix of additional investments, I used the

percentages of last historical year to project capex and depreciations of the forecast

years. Those calculations are presented in the table 28.

Table 28 - Property and Equipment, net - projected values

Property and equipment,

net schedule

($ in thousands)

F2024

F2025

F2026

F2027

F2028

Beginning PP&E

1 491 444

1 577 812

1 700 760

1 858 310

2 036 488

Capex

467 104

525 732

591 720

652 567

720 685

Depreciation

(380 736)

(402 784)

(434 170)

(474 389)

(519 874)

Ending PP&E

1 577 812

1 700 760

1 858 310

2 036 488

2 237 298

Capex as % of Total Revenue

1,3%

Depreciation as % of

Opening PP&E

-25,5%

Source: own presentation

Other current assets forecast

Other current assets are mainly trade receivables and prepaid expenses.

Therefore, they can be express as a percentage of total revenues as presented in the

table 29.

Table 29 - Other current assets - historical values

Other current assets

schedule

($ in thousands)

2018

2019

2020

2021

2022

2023

Other current assets

748 466

1 160 067

1 556 030

2 042 021

3 208 021

2 780 247

Total Revenues

15 794 341

20 156 447

24 996 056

29 697 844

31 615 550

33 723 297

Other current assets

as % of Total

Revenues

10%

Source: own presentation based on Netflix Annual Reports

Assuming the last year historical rate, 8%, of other current assets as a percentage

of total revenues, I projected the value of other current assets in the forecast years as

shown in the table 30.

Table 30 - Other current assets - projected values

Other current assets

schedule ($ in thousands)

F2024

F2025

F2026

F2027

F2028

Other current assets

2 885 060

3 247 177

3 654 750

4 030 571

4 451 299

Total Revenues

34 994 637

39 386 974

44 330 677

48 889 232

53 992 494

Other current assets as %

of Total Revenues

Source: own presentation

Content liabilities forecast

As the content liabilities are directly linked to the content assets they can be

presented as a percentage of content assets. Thus, it was calculated those rates for both,

current and non-current content liabilities, and computed in the tables 31 and 32.

Table 31- Current content liabilities - historical values

Source: own presentation based on Netflix Annual Reports

Table 32 - Non-current content liabilities - historical values

Source: own presentation based on Netflix Annual Reports

To forecast the values for the current and non-current content liabilities, I used

the rate of the last historical year as can be seen in the tables 33 and 34 below presented.

Table 33 - Current content liabilities - projected values

Source: own presentation

Current content

liabilities schedule

($ in thousands)

2018

2019

2020

2021

2022

2023

Current content liabilities

4 681 562

4 413 561

4 429 536

4 292 967

4 480 150

4 466 470

Content assets

20 102 327

24 504 567

25 383 950

30 919 539

32 736 713

31 658 056

Current content liabilities

as % of Content Assets

23%

18%

17%

14%

Non-current content

liabilities schedule

($ in thousands)

2018

2019

2020

2021

2022

2023

Non-current content

liabilities

3 759 026

3 334 323

2 618 084

3 094 213

3 081 277

2 578 173

Content assets

20 102 327

24 504 567

25 383 950

30 919 539

32 736 713

31 658 056

Non-current content

liabilities as a % of

Content assets

19%

14%

10%

Current content liabilities

schedule ($ in thousands)

F2024

F2025

F2026

F2027

F2028

Current content liabilities

4 412 403

4 577 370

4 887 545

5 252 354

5 668 402

Content assets

31 274 835

32 444 105

34 642 608

37 228 349

40 177 272

Current content liabilities as

% of Content Assets

14%

Table 34 - Non-Current content liabilities - projected values

Source: own presentation

Accounts payable forecast

Accounts payable can be express as a percentage of cost of revenues.

Therefore, in the forecast years, I assumed projected values as 4% (the percentage of

the last historical year) of the cost of revenues. Those calculations are presented in the

tables 35 and 36.

Table 35 - Accounts payable - historical values

Accounts

payable schedule

($ in thousands)

2018

2019

2020

2021

2022

2023

Accounts payable

562 985

674 347

656 183

837 483

671 513

747 412

Costs of revenues

(9 967 538)

(12 440 213)

(15 276 319)

(17 332 683)

(19 168 285)

(19 715 368)

Accounts payable

as % of cost of

revenues

-6%

-5%

-4%

-5%

-4%

Source: own presentation based on Netflix Annual Reports

Table 36 - Accounts payable - projected values

Accounts payable

schedule ($ in thousands)

F2024

F2025

F2026

F2027

F2028

Accounts payable

722 785

714 036

740 731

790 925

849 961

Costs of revenues

(19 065 757)

(18 834 966)

(19 539 148)

(20 863 175)

(22 420 412)

Accounts payable as % of

cost of revenues

-4%

Source: own presentation

Non-current content

liabilities schedule ($ in

thousands)

F2024

F2025

F2026

F2027

F2028

Non-current content

liabilities

2 546 964

2 642 187

2 821 229

3 031 807

3 271 962

Content assets

31 274 835

32 444 105

34 642 608

37 228 349

40 177 272

Non-current content

liabilities as a % of Content

assets

Accrued expenses and other liabilities and Deferred revenue forecast

Accrued expenses and other liabilities and deferred revenue can be computed

as a percentage of total revenues. Thus, after the calculation of that percentage during

the historical years, I used the percentage of the last historical year to project the values

of the accrued expenses and deferred revenue in the forecast years.

The tables 37, 38, 39 and 40 were computed as explained above.

Table 37 - Accrued expenses and other liabilities - historical values

Accrued expenses and

other liabilities schedule

($ in thousands)

2018

2019

2020

2021

2022

2023

Accrued expenses and

other liabilities

481 874

843 043

1 102 196

1 449 351

1 514 650

1 803 960

Total Revenues

15 794 341

20 156 447

24 996 056

29 697 844

31 615 550

33 723 297

Accrued expenses and other

liabilities as % of Total

Revenues

Source: own presentation based on Netflix Annual Reports

Table 38 - Deferred revenue - historical values

Deferred revenue

schedule ($ in thousands)

2018

2019

2020

2021

2022

2023

Deferred revenue

760 899

924 745

1 117 992

1 209 342

1 264 661

1 442 969

Total Revenues

15 794 341

20 156 447

24 996 056

29 697 844

31 615 550

33 723 297

Deferred revenue as a % of

Total Revenues

Source: own presentation based on Netflix Annual Reports

Table 39 - Accrued expenses and other liabilities - projected values

Accrued expenses and other

liabilities schedule

($ in thousands)

F2024

F2025

F2026

F2027

F2028

Accounts payable

1 871 968

2 106 927

2 371 380

2 615 231

2 888 220

Total Revenues

34 994 637

39 386 974

44 330 677

48 889 232

53 992 494

Accrued expenses and other

liabilities as % of Total Revenues

Source: own presentation

Table 40 - Deferred revenue - projected values

Deferred revenue schedule

($ in thousands)

F2024

F2025

F2026

F2027

F2028

Deferred revenue

1 497 368

1 685 309

1 896 843

2 091 896

2 310 257

Total Revenues

34 994 637

39 386 974

44 330 677

48 889 232

53 992 494

Deferred revenue as a % of Total

Revenues

Source: own presentation

Long term debt Forecast

As stated by the CFO Spencer Neuman Netflix in the Q42023 call earnings,

Netflix has been anchoring to $10-$15 billions of gross debt (short-term debt and long-

term debt) and a minimum cash equivalent to two months of revenue, over the past

several years. One of the Netflix priorities is to maintain a healthy balance sheet, ample

liquidity and return excess cash to shareholders through share repurchases. (Netflix,

2024a) Therefore, in the forecast years, I assume that the long-term debt will vary 1%

each year so that the gross debt remains between $10-$15 billions.

Other Items Projections

Other items projections such as short-term investments, short term debt, other

non-current assets and other non-current liabilities are extremely difficult to project

due to their nature. Thus, they were left constant as the value of the last historical year.

After all those calculations, it was possible to compute the Balance Sheet

Forecast below presented in table 41.

Table 41 - Balance sheet forecast

Balance Sheet Forecast

($ in thousands)

F2024

F2025

F2026

F2027

F2028

Assets

Cash and cash equivalents

13 584 447

21 987 647

32 276 766

44 146 686

57 773 053

Short-term investments

20 973

Other current assets

2 885 060

3 247 177

3 654 750

4 030 571

4 451 299

Total current assets

16 490 480

25 255 797

35 952 489

48 198 230

62 245 325

Non-current content

assets, net

31 274 835

32 444 105

34 642 608

37 228 349

40 177 272

Property and equipment,

net

1 577 812

1 700 760

1 858 310

2 036 488

2 237 298

Other non-current assets

5 664 359

Total non-current assets

38 517 006

39 809 224

42 165 277

44 929 196

48 078 928

Total assets

55 007 486

65 065 021

78 117 766

93 127 425

110 324 253

Liabilities

Current content liabilities

4 412 403

4 577 370

4 887 545

5 252 354

5 668 402

Accounts payable

722 785

714 036

740 731

790 925

849 961

Accrued expenses and

other liabilities

1 871 968

2 106 927

2 371 380

2 615 231

2 888 220

Deferred revenue

1 497 368

1 685 309

1 896 843

2 091 896

2 310 257

Short-term debt

399 844

Total current liabilities

8 904 368

9 483 486

10 296 344

11 150 251

12 116 684

Non-current content

liabilities

2 546 964

2 642 187

2 821 229

3 031 807

3 271 962

Long-term debt

14 284 851

14 427 700

14 571 977

14 717 696

14 864 873

Other non-current

liabilities

2 561 434

Total non-current

liabilities

19 393 249

19 631 321

19 954 640

20 310 938

20 698 269

Total liabilities

28 297 617

29 114 807

30 250 984

31 461 188

32 814 953

Stockholders' equity

Common stock

5 145 172

Treasury stock at cost

(6 922 200)

Accumulated other

comprehensive income

(loss)

(223 945)

Retained earnings

28 710 842

37 951 188

49 867 755

63 667 210

79 510 273

Total stockholders'

equity

26 709 869

35 950 215

47 866 782

61 666 237

77 509 300

Total liabilities and

stockholders' equity

55 007 486

65 065 021

78 117 766

93 127 425

110 324 253

Source: own presentation

4.1.3 Free Cash Flow to the Firm Calculation

Free cash flow to the firm (FCFF) is considered a key measure of a company's

financial health because it reflects the cash that is available to remunerate shareholders

and debtholders after covering all operating and investing activities necessary to

maintain the business. Besides that, financial analysts often use FCFF to evaluate a

company's ability to pay dividends, repay debt, invest in new projects, or buy back

shares.

It is calculated by starting with the Net Operating Profit After Tax (NOPAT),

which can be obtained by multiplying Earnings Before Interest and Taxes (EBIT) by

(1-Tax Rate), then adding back non-cash expenses (such as Depreciation and

Amortization of Content), subtracting capital expenditures (Capex and Additions to

Content) and adjusting for changes in working capital. (Steiger, 2010)

Free cash flow to the firm is also an important financial indicator of the

company’s share value since the price of a stock can be express as the sum of the

company's expected future cash flows. Understanding a company's FCFF allows

investors to test whether a stock is fairly valued because stocks are not always

accurately priced.

Using the projected values, it was possible to compute the FCFF as presented in

the table 42:

Table 42 - Free Cash Flow to the Firm

Free Cash Flow to the

firm ($ in thoushands)

F2024

F2025

F2026

F2027

F2028

EBIT * (1 - T)

6 793 516

9 918 430

12 600 837

14 489 971

16 539 889

(-) Δ Working Capital

(61 432)

(135 907)

(116 424)

(81 776)

(88 704)

(-) Additions to content

(13 346 418)

(14 732 712)

(16 269 040)

(17 609 737)

(19 094 317)

(-) Capex

(467 104)

(525 732)

(591 720)

(652 567)

(720 685)

(+) DA

14 110 375

13 966 226

14 504 707

15 498 385

16 665 269

FCFF

7 028 936

8 490 305

10 128 361

11 644 276

13 301 453

Source: own presentation

4.1.4 Growth rate calculation

According to the perpetuity assumption, I have to discount all (the infinity of)

cash flows that the company will generate in the future. Since it is difficult to estimate

future years far ahead in time, after estimating the five forecast years, it is assumed

that the company will continue its operations at a perpetuity, growing at a certain rate.

That growth rate will be responsible to determine the Terminal Value. This Terminal

Value implies a strong assumption that after the year 2028 the company will present a

stable growth.

To obtain the growth rate (g), I multiplied the EBIT Reinvestment

Rate of 2028 by the Return on Capital (ROC) of 2028. It is important to highlight that

the final Enterprise Value is extremely sensitive to this. Thus, I will present later a

sensitivity analysis regarding possible variations of this rate. Another important matter

related to this rate is that this rate should be between 0% and 5%. The rate has to be

inferior to the economy’s growth rate (5%) because it is not realistic to predict that the

company would be bigger, someday in the future, than the whole economy. At the

same time, the rate has also to be positive to sustain the perpetuity assumption.

(Steiger, 2010)

Applying the formula stated above, it was possible to reach a value of 3,49%

for the growth rate in a stable period as shown by the table 43.

Table 43 - Growth rate estimation

Estimation of g

FCFF Growth Rate in a Stable Period

g (EBIT Reinvestment Rate * ROC)

3,49%

EBIT Reinvestment Rate (((CPX + Additions - DA) + Δ WC) / (EBIT * (1 - T)))

20%

ROC (EBIT *(1-T)) /(D+E)

18%

Source: own presentation

4.1.5 WACC calculation

When valuing a company through the Discounted Cash Flow (DCF) approach,

one must apply the weighted average cost of capital (WACC) to discount the projected

free cash flows (FCF). Since free cash flow is the cash that is available to all the

company’s financial stakeholders, the WACC should equally reflect the expected

returns demanded by each category of investor. (Koller et al., 2010)

Thus, to find a suitable rate to discount the free cash flows, I calculated the

weighted average cost of capital (WACC).

The WACC could be calculated by the following formula:

KWACC = we x ke + wd x kd x (1−T)

wd –Debt Weight

kd – Cost of debt

T – Tax rate

We –Equity Weight

ke – Cost of equity

The Capital Pricing Asset Model was used to determine the cost of equity, that

is given by the following formula:

Ke"=#rf"+#βL""x#market#risk#premium#

In the formula above, the risk-free asset (rf) represents the asset with the lowest

risk possible, which, in this case, I use the yield of the 10 Y US Treasury bonds

(4,260%). Regarding the market risk premium, I assumed the US’s market risk

premium consulted on Damodaran website (4,60%).

To determine the beta value, I gathered historical data for the past five years

from the Investing website. This data included the share price of Netflix and the SP

500 index, where Netflix shares are traded. Using this data, I performed calculations

to determine the slope, covariance, and established a regression model. The resulting

beta value was 1,04, as it is presented below.

Figure 3 - Beta Regression Model

Source: own presentation

The next step is to calculate the cost of debt that is given by the following formula:

Kd = rf + risk premium

The risk-free asset is the same as mentioned above and the risk premium can

be substituted by the default spread. To know the default spread is needed to know

Netflix credit rating. Thus, according to Fitch and S&P, Netflix is a BBB+ company.

After that, it is possible to consult the Damodaran website to know what default spread

for a company with this rating is, which in Netflix’s case is 1,47%.

After determining the necessary data, the WACC can be calculated. Results are

in the table 44.

SUMMARY OUTPUT

Regression Statistics

Multiple R 0,47854064

R Square 0,22900114

Adjusted R Square 0,22842405

Standard Error 0,02525938

Observations 1338

ANOVA

df SS MS FSignificance F

Regression 1 0,253183737 0,25318374 396,817091 1,62123E-77

Residual 1336 0,852416593 0,00063804

Total 1337 1,105600331

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Lower 95,0%

Upper 95,0%

Intercept 0,00033521 0,00069131 0,48489095 0,6278332 -0,001020961 0,00169138 -0,001021 0,00169138

X Variable 1 1,04723651 0,052571406 19,9202683 1,6212E-77 0,944105018 1,15036801 0,94410502 1,15036801

Table 44 - WACC calculation

Source: own presentation

4.1.6 Determine Valuation

The Discounted Cash Flow (DCF) valuation is a method that aims to estimate the

value of a company taking into account its future expected cash flows. The main

principle of this method is the time value of money. Therefore, the present value of

expected future cash flows are calculated by using a projected discount rate, in this

case, the WACC. The valuation implied by DCF is also known as the company's

intrinsic value. When the intrinsic value measure is compared to the market value of

the company it is possible to conclude whether a stock is undervalued or overvalued.

In the following DCF valuation, I estimate the present value of projected FCFF

from 2024 to 2028 and the terminal value. The concept of terminal value in DCF

analysis is predicated on the assumption of a steady growth rate beyond the period of

detailed examination. Determining an appropriate perpetual growth rate is a critical

aspect of DCF analysis, as slight changes in this rate can significantly impact the

terminal value, and consequently, in the firm value. (Steiger, 2010)

WACC

F2024

F2025

F2026

F2027

F2028

Perpetuity

Risk free rate

4,260%

Beta levered

1,04

Equity risk premium

4,60%

Cost of equity

9,04%

Risk free rate

4,26%

Default spread

1,47%

Cost of debt

5,73%

Equity

26 709 869

35 950 215

47 866 782

61 666 237

77 509 300

Debt

14 684 695

14 827 544

14 971 821

15 117 540

15 264 717

Equity weight

65%

71%

76%

80%

84%

Debt weight

35%

29%

24%

20%

16%

WACC

7,60%

7,85%

8,07%

8,24%

8,37%

The terminal value, that is the company's value beyond the projection period, can

be calculated through the Gordon Model presented in the next formula.

TV =

!"!!!"#

$%&&

(

)

* , where

FCFF!"# =$FCFF!∗(1+𝑔)

To obtain the Enterprise Value, I have discounted every expected free cash-flows

to the firm, using the following formula:

Table 45 - Present value of Free cash flow to the firm

F2024

F2025

F2026

F2027

F2028

FCFF

7 028 936

8 490 305

10 128 361

11 644 276

13 301 453

281 985 956

WACC

7,60%

7,85%

8,07%

8,24%

8,37%

Present Value FCFF

($ in thousands)

6 532 713

7 299 049

8 024 278

8 483 122

8 898 274

174 066 638

Source: own presentation

Table 46 - Intrinsic share price

Enterprise value ($ in thousands)

213 304 074

Net debt (2023) ($ in thousands)

7 405 375

Equity ($ in thousands)

205 898 699

Shares outstanding (in thousands)

432 760

Share Price (in $)

475,78

Source: own presentation

EV$$ = $- FCFF%

(1$+$k&'(()%

)

%*+*$ $ = $- FCFF%

(1$+$k&'(()%$+$ 𝑇𝑉

(1$+$k&'(()!

%*+*#

By applying the formula, I concluded that the present value of the Enterprise

Value of Netflix is $213 304 074 thousands. By decreasing this value by the amount

of net debt, I reach an equity value of $205 898 699 thousands. Then, the equity value

is divided by number of shares outstanding. After that, it is possible to estimate the

intrinsic value Netflix share, $475,78.

Table 47 - Market share price

Market share price at 16/04/2024 (in $)

617,52

Price variation

-23,0%

Source: own presentation

Comparing the intrinsic share price of Netflix with the market price on 16th of

April is possible to conclude that the share price is overvalue by 23%.

4.2 Relative Valuation

The Relative Valuation, also known as Multiple Valuation, is one of the most

used valuation methods. This method consists of comparing the company’s value

under study with the industry peers and can be structured by steps. The first step is to

select a group of comparable companies. The subsequent step is to gather the necessary

financial data. The third step is to disseminate key statistics, ratios and trading

multiples. Finally, the last step is to ascertain the valuation. (Rosenbaum & Pearl,

2009)

The selection of peer companies was based on an analysis of various factors.

One of the determining factors in choosing the peers was the sector in which they

operated. Thus, Warner Bros Discovery, Walt Disney company, Paramount and

Comcast Corporation were chosen.

Other criteria were size and potential growth. For example, Amazon Prime

Video and Apple Tv+ are subservices of Amazon.com, Inc and Apple, Inc.,

respectively, which are companies that operate in different sectors. These companies

have presence in multiple market segments, but they are are expanding their footprint

in the streaming industry. Thus, Amazon and Apple were also considered in this

valuation method as comparable peers because of its large market size and strong

growth potential. Moreover, they are also considered to be hype companies due to their

dynamic market positioning and perceived potential that attract investors' attention.

Finally, the geographical location where the companies operate was other

factor considered. All the companies selected have a strong global presence, especially

in the US, where they have a large market penetration.

After analyzing the annual reports of the comparable companies and searching

for information in Refinitiv data base, the table 48 was computed. The gathered data

reflects the financial outcomes accessible up to the end of FY2023 (31/12/2023).

Financial results for Q1 2024 were excluded as they were not available on the valuation

date. For the peer company Disney, the analysis incorporated the last 12 months’ data

due to its fiscal year ending in September. This includes data from January to

September 2023, corresponding to Q2-Q4 of 2023, and data from September to

December 2023, corresponding to Q1 2024.

Table 48 - Peers analysis

In thousands

except price

per share

Netflix

Apple

Amazon

Warner Bros.

Discovery

Walt Disney

Company

Paramount

Comcast

corporation

Price per Share

$ 575,79

$ 191,73

$ 161,26

$ 10,49

$ 97,49

$ 13,75

$ 42,85

Outstanding

432 760

15 552 752

10 387 381

2 439 687

1 830 316

652 000

3 962 413

Equity

20 588 313

62 146 000

201 875 000

46 307 000

103 957 000

23 050 000

83 226 000

Enterprise

Value

220 502 852

2 727 293 861

1 569 160 607

70 170 000

194 530 571

22 494 030

268 138 747

Net income

5 407 990

96 995 000

30 425 000

(3 079 000)

3 390 000

(608 000)

15 107 000

EBIT

6 954 003

114 301 000

36 852 000

(1 548 000)

5 100 000

(451 000)

23 314 000

EBIT Margin

21%

30%

-4%

-2%

19%

EBITDA

21 508 387

125 797 687

67 811 608

16 990 315

14 324 784

3 060 412

37 659 936

Sales

33 723 297

383 285 000

574 785 000

41 321 000

88 898 000

29 652 000

121 572 000

Market

Capitalization

249 178 644

2 981 929 141

1 675 069 107

25 592 319

178 437 499

8 965 000

169 789 396

Source: own presentation based on the companies annual reports and Refinitiv

The multiples used for this valuation method were the Price Earnings ratio

(PER), Price to Sales ratio (Price/Sales), EV/EBIT ratio and the EV/EBITDA ratio.

After calculating those ratios for all the peers, the average and the median was

computed, as it is possible to see in the table 49 presented below. Negative ratios were

not considered in the calculation of average and median. The median values were used,

since it is a measure less affected by the existence of outliers, and therefore more

consistent.

Table 49 - Multiples ratios

Source: own presentation

Using the median value of each ratio, after some calculations, I reached to a

four different Netflix share prices, as it is shown in the tables 50 to 53. Values are

presented in thousands of dollars, except for the share price value.

PER

Price/sales

EV / EBIT

EV/EBITDA

Apple

30,74

7,78

23,86

21,68

Amazon

55,06

2,91

42,58

23,14

Warner Bros. Discovery

-8,31

0,62

-45,33

4,13

Walt Disney Company

52,64

2,01

38,14

13,58

Paramount

-14,75

0,30

-49,88

7,35

Comcast Corporation

11,24

1,40

11,50

7,12

Average

37,42

2,50

29,02

12,83

Median

41,69

1,70

31,00

10,47

Netflix

46,08

7,39

31,71

10,25

Table 51 – PER ratio valuation

Table 50 – Price/Sales ratio valuation

Price /Sales

Price/sales

1,70

Sales

33 723 297

Market Cap

57 394 220

Shares Outstanding

432 760

Netflix Share Price

132,62

Market Share Price at 16/04/2023

617,52

Overvalue

PER

PER Sector

41,69

EPS Netflix

12,50

Netflix Share Price

520,98

Market Share Price at 16/04/2023

617,52

Overvalue

Source: own presentation

The results of the relative valuation suggest a high variance of the hypothetical

Netflix’s share price depending on the multiple used.

According to the PER ratio the share price should be $520,98 in accordance

with the EV/EBIT ratio it should be $481,06 and taking into account the EV/EBITDA

ratio it should be $503,00. These values are in line with the value reached in the DCF

valuation, $475,78, since they are rather close to it.

Regarding the Price/Sales ratio the share price should be $132,62 In this case,

the share value obtained is not very reliable, as it estimates a share value well below

the current market value. Thus, in this case the relative valuation is merely indicative.

Therefore, it can be concluded that this method entails a great deal of

subjectivity derived from its assumptions and the extreme difficulty of finding perfect

comparable companies. However, all estimated share prices indicate that Netflix's

stock is overvalued, as concluded with the DCF model.

EV/EBITDA

EV/EBITDA Sector

10,47

EBITDA

21 508 387

EV Total

225 085 270

Net debt

7 405 375

Equity

217 679 895

Shares Outstanding

432 760

Netflix Share Price

503,00

Market Share Price at 16/04/2023

617,52

Overvalue

EV/EBIT

EV/EBIT Sector

31,00

EBIT Total

6 954 003

EV Total

215 587 581

Net debt

7 405 375

Equity

208 182 206

Shares Outstanding

432 760

Netflix Share Price

481,06

Market Share Price at 16/04/2023

617,52

Overvalue

Table 52 - EV/EBITDA ratio valuation

Table 53 - EV/EBIT ratio valuation

4.3 Summary of valuation

In this section, I utilized a football field chart as a summarizing tool. This chart

consolidates data obtained from various valuation methods, such as the Discounted

Cash Flow (DCF) model and the Relative Valuation. By illustrating the minimum and

maximum values derived from each method alongside with the market share price of

the valuation date represented by the blue dark line, the chart presents a comprehensive

overview of Netflix's potential intrinsic value. This perspective facilitates investors in

gaining a thorough understanding of Netflix valuation, empowering them to make

well-informed investment decisions.

Graphic 10 - Football field Valuation

Source: own presentation

376,49

323,25

316,65

330,79

322,76

671,89

665,33

613,63

628,99

636,18

0 100 200 300 400 500 600 700 800 900 1000

DCF

PER

EV/EBIT

EV/EBIDA

52 week range

5 Investment risks

This chapter examines the investment risks associated with Netflix, such as

market, operational, regulatory, and macroeconomic factors, each posing potential

challenges to the company's performance and valuation.

Furthermore, given that the DCF valuation relies on a series of key assumptions,

a sensitivity analysis is conducted to assess the impact of these assumptions on the

valuation output. This analysis helps evaluate the robustness of the valuation model

by identifying the sensitivity of the target price to changes in the growth rate and the

WACC.

5.1 Market risk

Adverse Market Competition (MR1)

First of all, the Netflix´s growth relies heavily on its ability to penetrate new

markets and expand its subscriber base. In countries where Netflix have been operating

for many years or where it is highly penetrated, the membership growth is slower than

in newer or less penetrated countries. Besides that, the streaming industry is becoming

increasingly crowded, with competitors like Amazon Prime Video, Disney+, Hulu,

HBO Max, and others vying for subscribers. Overall, the market for entertainment is

intensely competitive and subject to rapid change. Consumers have a wide range of

options related to entertainment such as streaming platforms, video games, social

media, and live transmissions. The key to overperformance in this market is offering

services with unique offerings. Another important risk is the threat of piracy since it is

difficult to compete against free virtually content. Piracy not only affects Netflix's

revenue by diverting potential subscribers but also undermines its efforts to protect

intellectual property rights. Additionally, piracy can erode consumer confidence in

paying for content, potentially impacting Netflix's subscriber retention and growth.

(Netflix, 2023a)

5.2 Operational risk

Cyber Threat (OR1)

As a digital platform handling with vast amounts of user data and proprietary

information, Netflix is susceptible to cyber threats such as data breaches, hacking, and

ransomware attacks. Any significant disruption or unauthorized access to Netflix’

computer systems including those relating to cybersecurity could result in a loss or

degradation of service, disclosure or destruction of data, or even theft of intellectual

property. Although Netflix have implemented certain systems and processes to thwart

hackers and protect data and systems, the techniques used to gain unauthorized access

to data and software are constantly evolving, and it may be difficult to anticipate, detect

or prevent unauthorized access. (Netflix, 2023a)

License agreements and Copyright (OR2)

Netflix's ability to provide a diverse range of content to its subscribers relies

on securing licensing agreements with studios, content providers, and other rights

holders. If these parties refuse to license content on terms acceptable to Netflix, it could

adversely affect Netflix's business. Besides that, Netflix relies on confidentiality and

license agreements, as well as trademark, copyright, patent, and trade secret protection

laws, to safeguard its proprietary rights. However, challenges such as third-party

infringement, unauthorized use, or misappropriation of intellectual property could

diminish the value of Netflix's brand and assets. (Netflix, 2023a)

5.3 Regulatory risk

Tax jurisdictions (RR1)

Netflix is a US-based multinational company subject to tax in multiple US and

foreign tax jurisdictions. Netflix is subject to the periodic examination of domestic and

foreign tax authorities, therefore significant judgment is required in determining the

global provision for income taxes, deferred taxes and other tax liabilities and

receivables. Tax laws are regularly being re-examined and evaluated globally. In that

sense, adapting to evolving tax laws, addressing tax audit challenges and accurately

forecasting tax liabilities are critical for Netflix to mitigate the potential adverse

impacts on its financial performance and overall business operations. (Netflix, 2023a)

ESG Concerns (RR2)

Nowadays, there is an increasing focus from regulators, investors, members,

and other stakeholders on environmental, social, and governance (“ESG”) matters,

including the adoption of new disclosure and regulatory frameworks. (Netflix, 2023a)

Netflix has a low ESG rating, 16.4 out of 100 with 0.1 on Environmental Risk Score,

7.3 on Social Risk Score and 9.0 on Governance Risk Score. ESG score is one of the

factors that can impact the investor decision, therefore this highlights the need of

Netflix to continuing meet their green objectives, since negative perceptions of

Netflix's ESG performance may lead to reputational damage and erode trust among

stakeholders. (Yahoo, 2023)

5.4 Macroeconomic risks

Interest Rates (MER1)

There is currently uncertainty in financial markets surrounding the economic

situation, specifically the rise of interest rates, which leads to higher borrowing costs

and debt costs exposed to significant volatility in the future. Since Netflix is a company

with a substantial amount of indebtedness and other obligations, including streaming

content obligations, rising interest rates could adversely affect its financial position.

FED interest rate has remained at 5,25% to 5,5% since 2023, but after its December

2023 meeting, the Federal Open Market Committee (FOMC) predicted making three

quarter-point cuts by the end of 2024 to lower the federal funds rate to 4,6%. (CNBC,

2024a)

Inflation (MER2)

Another important macroeconomic factor is the inflation. Since 2020, inflation

rates, all over the world, have been rising. Although inflation can drive up operating

costs for Netflix, including content production, marketing, and technology

infrastructure, the biggest concern with inflation is related with the consumers'

purchasing power and household budget. Since there is an intense competition in the

streaming industry, an increase in inflation can represent a challenge in retaining

subscriber because customers may prioritize essential expenses over discretionary

spending.

According with the forecast of International Monetary Fund (IMF), it predicts

to fall to 5,9% (worldwide metric) in 2024, following a decreasing trend in the coming

years, as it is possible to observe in the table 54. (IMF, 2024)

Table 54 - Inflation projections worldwide

Inflation

2023

2024

2025

2026

2027

2028

2029

Worldwide

6,8%

5,9%

4,5%

3,7%

3,5%

3,4%

United States

4,1%

2,9%

2,0%

2,1%

Europe

6,3%

3,4%

2,7%

2,5%

2,4%

Asia and Pacific

5,1%

5,0%

4,3%

3,6%

3,4%

Middle East

12,5%

10,7%

9,2%

8,0%

7,4%

7,3%

7,2%

Africa

18,2%

18,4%

14,4%

9,9%

9,0%

8,1%

7,6%

Latina America

14,4%

16,7%

7,7%

5,6%

4,4%

3,8%

3,6%

Source: International Monetary Fund

Exchange Rates (MER3)

Netflix is also exposed to the foreign currency risk because as a global business

it operates in multiple currencies. Currencies denominated in other than the US dollar

accounted for 57% of revenue and 28% of operating expenses for the year ended

December 31, 2023. Netflix has foreign currency risk related to different foreign

currencies, with largest exposures being the Euro, the British pound, the Brazilian real,

the Canadian dollar and the Mexican peso. Accordingly, volatility in exchange rates,

and in particular a weakening of foreign currencies relative to the US dollar may

negatively affect its revenue and operating income as expressed in US dollars. Even

Netflix adopted a hedging strategy in 2023 entering foreign exchange forward

contracts to mitigate exchange rate risks, Netflix is still subject to the exchange rate

risk. (Netflix, 2023a)

5.5 Risk matrix

The mentioned risks were computed in a risk matrix according to the likelihood

of occurrence and consequently impact on the company.

Label:

Adverse Market Competition (MR1)

Cyber Threat (OR1)

License agreements and Copyright (OR2)

Tax jurisdictions (RR1)

ESG Concerns (RR2)

Interest Rates (MER1)

Inflation (MER2)

Exchange Rates (MER3)

MER1

Low Medium High

Probability

Impact

Low Medium High

RR2

MER3

OR2

RR1

MR1

MER2

OR1

Figure 4 - Risk matrix

Source: own presentation

5.6 Sensitivity analysis

As already mentioned before, the Terminal Value is highly sensitive to the

estimated growth rate. Besides that, the intrinsic share price previous calculated is also

extremely sensitive to variations in the growth rate and in the discount rate, in this

case, the WACC since changes in the WACC and in the growth rate are due to

macroeconomic and market factors.

In the case of WACC, it is sensitive to macroeconomic fluctuations, including

interest rates, risk premiums and the overall economic environment. For instance, a

reduction in interest rates leads to a decreased of cost of debt and consequently

lowering the WACC.

Regarding the growth rate, it reflects the rate at which the company grows over a

stable period. A growth rate can be influenced by changes in industry dynamics,

competition, and technological advances. For example, a slight decrease in the growth

rate may reflect more conservative estimates of future revenue growth, perhaps due to

market saturation or increased competition. Thus, a lower growth rate reduces future

cash flows, which could lower the company's valuation.

In order to understand how the previous share price will react to fluctuations of

growth rate and WACC values, I performed a sensitivity analysis. In this analysis, the

WACC vary between 7,37% and 9,37% and the g vary between 2,89% and 4,09% The

share price obtained for each scenario is shown in the table 55.

Table 55 - Sensitivity analysis

Growth rate

WACC

7,37%

7,87%

8,37%

8,87%

9,37%

2,89%

511,68

467,71

431,76

401,81

376,49

3,19%

543,11

492,96

452,49

419,15

391,19

3,49%

579,40

521,68

475,78

438,41

407,40

3,79%

621,77

554,62

502,12

459,95

425,34

4,09%

671,89

592,78

532,14

484,19

445,32

Source: own presentation

The share price that was obtained in the DCF valuation is the blue one ($475,78),

the best scenario is the green one ($671,89) and the worst is the red one ($376,49).

Analyzing these values, it is possible to conclude the share value could vary between

$376,49 to $671,89, which is a huge range. Thus, it is possible to conclude that slight

changes in the assumptions would change the intrinsic share price and consequently

change the final recommendation.

6 Investment Summary

The investment summary chapter, serves as a culmination of the thesis's

analysis, offering a final recommendation to retail investors and it is aligned with the

comprehensive analysis conducted throughout the thesis.

Table 56 - Investment summary

Recommendation

SELL

Price target FY2024

$475,78

Price (as of 16-April-2024)

$617,52

52-week range ($)

$322,76 – $636,18

Market Cap ($thousands)

249 178 644

Shares Outstanding (thousands)

432 760

Source: own presentation

Companies that pay dividends provide investors with a regular income. In that

sense, income investors are more focused on generating ongoing cash flow from their

investments rather than generating capital gains when selling holdings over time. On

the other hand, there are companies like Netflix, that do not pay dividends. Instead,

those companies reinvest its profits back into the business growth and expansion,

which can eventually lead to greater increases in share price and value for investors.

Netflix's decision to not pay dividends is based on its belief that reinvesting in

content creation and technology development will generate higher shareholder returns

in the long run. Besides that, this strategic decision has allowed the company to remain

at the forefront of the streaming industry. Therefore, Netflix investors are those who

are focused on making money based on changes in the Netflix share price.

Taking into account the DCF valuation model presented, my recommendation

to a Netflix investor it is to sell his Netflix stocks since Netflix’s stock price is currently

overvalued according to the model. In one year, the valuation model predicts a share

value of $475,78, 23% lower compared to the market share price on 16th April of 2024,

which was $617,52.

As an investor, one important metric to evaluate Netflix’s performance is the

number of subscribers. Thus, subsccription growth is an important profitability

measure for the company, as it helps in investment decisions.

As already mentioned, Netflix was one of the companies that managed to take

advantage of Covid-19 crisis, increasing the number of subscribers, and consequently

raising its share price to an all-time high. After this period, Netflix's shares plummeted

in 2022 due to the password sharing crackdown that led to the cancellation of

subscriptions.

Meanwhile, after experiencing a downfall on subscriptions in 2022, 2023 was

a turnaround year, as Netflix was able to rise back the number of subscribers and

quickly increase its share price. This rollercoaster ride highlights the volatility of

Netflix stock price since it is a company very sensitive to every market change.

After this boost in subscribers, investors and the general market started to

wonder how long this tendency would last. In fact, this rapid growth is what drove up

Netflix’s prices, resulting in an overvalued stock. It is important to note that the growth

in subscriptions experienced in 2021 and again in 2023, led investors to be quite

optimistic towards Netflix’s future, increasing expectations about a continuous upward

trend, which ultimately resulted in an unusual increase in stock price.

It is also important to highlight that the pandemic has led to a surge in retail

investors participating in the stock market, especially in hyped stocks. In fact, the

lockdown promoted social media platforms like Reddit, Twitter, and YouTube that

have become hubs for discussing stocks and sharing investment ideas. Online

communities, such as the WallStreetBets subreddit, have gained attention for their role

in driving momentum in certain stocks, often characterized by hype and speculative

trading. Those hyped stocks such as tech stocks like Netflix have captured the attention

of retail investors due to their high growth potential and media coverage. As a result,

this hype led to significant price swings as investors start to invest into these stocks

based on momentum rather than fundamentals.

In conclusion, although I have predicted a positive outlook for the future of

Netflix and a growing trend in the coming years, I believe that the stock is overvalued

due to the recent events mentioned above that have raised investors' expectations due

to its momentary hype.

Conclusions and Added Value

Netflix has revolutionized the entertainment landscape, fundamentally changing

the way people consume media entertainment. Having started out as a DVD rental

service, Netflix has wisely adapted its business model to emerging trends, evolving

into the dominant force in global streaming sector. Through strategic acquisitions and

the creation of award-winning original content, Netflix has fostered an engagement

subscriber base, driving remarkable growth and expansion worldwide.

By adopting a subscription-based model, Netflix has cemented its position in the

streaming market. However, by recognizing the evolution of consumer preferences

and the need to create a more affordable plan, it recently introduced a subscription plan

with ads to attract more subscribers.

Netflix was one of the companies that recently attracted the attention of retail

investors due to its remarkable performance in recent years. The stocks of big tech

companies are hype stocks and sometimes have periods of high volatility. Netflix's

share price has a 52-week range of $322,76 - $636,18, reaching its peak value on April

5th, 2024. In this sense, this dissertation aims to issue an investment recommendation

to interested parties.

Despite its success, Netflix faces growing competition in the entertainment

sector, driven by rapid technological advances and changes in consumer behavior,

especially among young people. To continue to navigate within this landscape, Netflix

must continue to innovate and adapt to maintain its competitive edge.

Therefore, after analyzing the competitive industry in which Netflix operates and

making projections for the future growth of the company, I calculated the intrinsic

value of the stock using two models, the DCF valuation and the Relative valuation.

While DCF provides a more detailed and comprehensive analysis but is heavily

dependent on assumptions. On the other hand, the relative valuation offers a quick and

simple comparison, but can overlook unique aspects of the company. Hence, utilizing

both methods offers a complementary perspective.

In the DCF valuation, I forecasted the future cash flows of the company based on

some assumptions and I estimated the company’s terminal value according to the

growth rate g of 3,49%, previously calculated. Then, to obtain the present value of the

Enterprise Value, I discounted the free cash flows and the terminal value to the present

using the WACC as a discount rate. Finally, after some calculations it was possible to

obtain an intrinsic share price of $475,78, which is overvalue by 23% when compared

to the share price on April 16th, 2023.

Regarding the Relative Valuation, this approach involved looking for companies

similar to Netflix in terms of business model, size and growth prospects. However,

given that most of Netflix's competitors do not operate solely in the VOD segment, the

chosen peers did not provide a reliable valuation. The multiples used for this valuation

method were the Price Earnings ratio, the Price to Sales ratio, the EV/EBIT ratio and

the EV/EBITDA ratio and they led to a share price between $520,98 and $132,62.

Despite the discrepancies obtained between the share prices calculated from each

multiple, they all pointed to the share being overvalued when compared to the share

value on April 16th, 2023.

After a careful examination of investment risks associated with Netflix, including

market fluctuations, operational challenges, regulatory changes and macroeconomic

factors, it is clear that these represent potential obstacles to the company's performance

and valuation.

Given that the DCF valuation relies on several key assumptions, I conducted a

sensitivity analysis since it is important to understand how changes in these

assumptions affect the valuation outcome. This analysis helps to measure the

robustness of the valuation model by assessing the sensitivity of the target price to

variations in growth rate and the WACC, thereby determining potential scenarios for

the share price.

Taking all these factors into account, the recommendation issued to retail

investors is to sell Netflix stock. This decision is based on the overall assessment of

Netflix's current position and future prospects set out on this dissertation.

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List of Figures, Graphics, Tables, and Abbreviations

List of Figures

Figure 1 - Worldwide Availability of Netflix 12

Figure 2 - Five Forces of Porter 28

Figure 3 - Beta Regression Model 68

Figure 4 - Risk matrix 81

List of Graphics

Graphic 1- Netflix 2023 Segment Revenues % 15

Graphic 2 - DVD segment Revenue (in thousands) 15

Graphic 3 - Evolution of paid memberships at the end of period per segment (in

thousands) 16

Graphic 4 - Netflix share price vs S&P 500 index (in $) 18

Graphic 5 - Paid subscribers in 2023 per streaming (in billion) 27

Graphic 6 - Evolution of Netflix Content Assets (in thousands of dollars) 34

Graphic 7 - Evolution of Debt. vs Equity (in thousands of dollars) 34

Graphic 8 - Evolution of average paying memberships (in thousands) 48

Graphic 9 - Revenues vs EBIT vs Net Income 56

Graphic 10 - Football field Valuation 75

List of Tables

Table 1 - Netflix subscription plans 14

Table 2 - SWOT Analysis 32

Table 3 - Netflix Content assets, net 33

Table 4 - Profitability Ratios 35

Table 5 - Profitability Ratios 36

Table 6 - Productivity Ratios 37

Table 7 - Leverage Ratios 38

Table 8 - Liquidity Ratios 39

Table 9- Market Ratios 40

Table 10 - Average Paying memberships – historical values 45

Table 11 - Average Paying memberships – projected values 47

Table 12 - Average Revenue per User - historical values 48

Table 13 - Average Revenue per User - projected values 49

Table 14 - Revenues forecast 50

Table 15 - Ads Revenues forecast 51

Table 16 - Cost of revenues - historical values 51

Table 17 - Cost of revenues - projected values 52

Table 18 - Operating Expenses - historical values 52

Table 19 - Operating Expenses - projected values 53

Table 20 - Interest expenses - historical values 53

Table 21 - Interest expenses - projected values 54

Table 22 - Income taxes - historical values 54

Table 23 - Income taxes - projected values 54

Table 24 - Income Statement forecast 55

Table 25 - Content assets, net - historical values 57

Table 26 - Content assets, net - projected values 57

Table 27 - Property and Equipment, net - historical values 58

Table 28 - Property and Equipment, net - projected values 58

Table 29 - Other current assets - historical values 59

Table 30 - Other current assets - projected values 59

Table 31- Current content liabilities - historical values 60

Table 32 - Non-current content liabilities - historical values 60

Table 33 - Current content liabilities - projected values 60

Table 34 - Non-Current content liabilities - projected values 61

Table 35 - Accounts payable - historical values 61

Table 36 - Accounts payable - projected values 61

Table 37 - Accrued expenses and other liabilities - historical values 62

Table 38 - Deferred revenue - historical values 62

Table 39 - Accrued expenses and other liabilities - projected values 63

Table 40 - Deferred revenue - projected values 63

Table 41 - Balance sheet forecast 64

Table 42 - Free Cash Flow to the Firm 65

Table 43 - Growth rate estimation 66

Table 44 - WACC calculation 69

Table 45 - Present value of Free cash flow to the firm 70

Table 46 - Intrinsic share price 70

Table 47 - Market share price 71

Table 48 - Peers analysis 72

Table 49 - Multiples ratios 73

Table 50 – Price/Sales ratio valuation 73

Table 51 – PER ratio valuation 73

Table 52 - EV/EBITDA ratio valuation 74

Table 53 - EV/EBIT ratio valuation 74

Table 54 - Inflation projections worldwide 80

Table 55 - Sensitivity analysis 82

Table 56 - Investment summary 84

List of Abbreviations

ACP - Average Collection Period

AIP - Average Inventory Period

APP - Average Payment Period

ARPU - Average Revenue per User

AVoD - Advertising Video on Demand

CAPEX - Capital Expenditure

CAPM - Capital Asset Pricing Model

CEO - Chief Executive Officer

CFO - Chief Financial Officer

CAGR - Compounded Annual Growth Rate

CCC - Cash Conversion Cycle

DA - Depreciations and Amortizations

DCF - Discounted Cash Flow Method

EBIT - Earnings Before Interest and Taxes

EBT - Earnings Before Taxes

ESG - Environmental, Social and Governance

EV - Enterprise Value

FCFE – Free Cash Flow to Equity

FCFF - Free Cash Flow to the Firm

FED - Federal Reserve

IRS - Internal Revenue Service

NOPAT - Net Operating Profit After Taxes

OTT - Over the top market

PER - Price Earnings Ratio

PP&E - Property, Plant, and Equipment

ROA - Return on Assets

ROE - Return on Equity

ROC - Return on Capital

ROIC - Return on Invested Capital

R&D - Research and Development

SVoD - Subscription Video on Demand

TV - Terminal Value

TVoD - Transactional Video on Demand

US - United States of America

UK – United Kingdom

VOD - Video on Demand

WACC - Weighted Average Cost of Capital

WWE - World Wrestling Entertainment

List of Annexes

Annex A – Balance Sheet Statement

Annex B – Income Statement

Annex C - Streaming Revenue and Membership Information by Region

Annex D – Key executives of Netflix and their role on the company

Annex E - Overview of the largest institutional shareholders and mutual fund holders

Annex F - Ratios Analysis of Peers

Annex A – Balance Sheet Statement

Balance Sheet

($ in thousands)

2018

2019

2020

2021

2022

2023

Assets

Cash and cash

equivalents

3 794 483

5 018 437

8 205 550

6 027 804

5 147 176

7 116 913

Short-term

investments

911 276

20 973

Other current assets

748 466

1 160 067

1 556 030

2 042 021

3 208 021

2 780 247

Total current assets

4 542 949

6 178 504

9 761 580

8 069 825

9 266 473

9 918 133

Non-current content

assets, net

20 102 327

24 504 567

25 383 950

30 919 539

32 736 713

31 658 056

Property and

equipment, net

418 281

565 221

960 183

1 323 453

1 398 257

1 491 444

Other non-current

assets

910 843

2 727 420

3 174 646

4 271 846

5 193 325

5 664 359

Total non-current

assets

21 431 451

27 797 208

29 518 779

36 514 838

39 328 295

38 813 859

Total assets

25 974 400

33 975 712

39 280 359

44 584 663

48 594 768

48 731 992

Liabilities

Current content

liabilities

4 681 562

4 413 561

4 429 536

4 292 967

4 480 150

4 466 470

Accounts payable

562 985

674 347

656 183

837 483

671 513

747 412

Accrued expenses and

other liabilities

481 874

843 043

1 102 196

1 449 351

1 514 650

1 803 960

Deferred revenue

760 899

924 745

1 117 992

1 209 342

1 264 661

1 442 969

Short-term debt

499 878

699 823

399 844

Total current liabilities

6 487 320

6 855 696

7 805 785

8 488 966

7 930 974

8 860 655

Non-current content

liabilities

3 759 026

3 334 323

2 618 084

3 094 213

3 081 277

2 578 173

Long-term debt

10 360 058

14 759 260

15 809 095

14 693 072

14 353 076

14 143 417

Other non-current

liabilities

129 231

1 444 276

1 982 155

2 459 164

2 452 040

2 561 434

Total non-current

liabilities

14 248 315

19 537 859

20 409 334

20 246 449

19 886 393

19 283 024

Total liabilities

20 735 635

26 393 555

28 215 119

28 735 415

27 817 367

28 143 679

Stockholders' equity

Common stock

2 315 988

2 793 929

3 447 698

4 024 561

4 637 601

5 145 172

Treasury stock at cost

(824 190)

(6 922 200)

Accumulated other

comprehensive

income (loss)

(19 582)

(23 521)

44 398

(40 495)

(217 306)

(223 945)

Retained earnings

2 942 359

4 811 749

7 573 144

12 689 372

17 181 296

22 589 286

Total stockholders'

equity

5 238 765

7 582 157

11 065 240

15 849 248

20 777 401

20 588 313

Total liabilities and

stockholders' equity

25 974 400

33 975 712

39 280 359

44 584 663

48 594 768

48 731 992

100

Annex B – Income Statement

Income Statement

($ in thousands)

2018

2019

2020

2021

2022

2023

Revenues

15 794 341

20 156 447

24 996 056

29 697 844

31 615 550

33 723 297

Cost of revenues

(9 967 538)

(12 440 213)

(15 276 319)

(17 332 683)

(19 168 285)

(19 715 368)

Marketing

(2 369 469)

(2 652 462)

(2 228 362)

(2 545 146)

(2 530 502)

(2 657 883)

Technology and

development

(1 221 814)

(1 545 149)

(1 829 600)

(2 273 885)

(2 711 041)

(2 675 758)

General and

administrative

(630 294)

(914 369)

(1 076 486)

(1 351 621)

(1 572 891)

(1 720 285)

Operating

Income/EBIT

1 605 226

2 604 254

4 585 289

6 194 509

5 632 831

6 954 003

Interest expenses

(420 493)

(626 023)

(767 499)

(765 620)

(706 212)

(699 826)

Interest and other

income

41 725

84 000

(618 441)

411 214

337 310

(48 772)

EBT

1 226 458

2 062 231

3 199 349

5 840 103

5 263 929

6 205 405

Income Taxes

(15 216)

(195 315)

(437 954)

(723 875)

(772 005)

(797 415)

Net income

1 211 242

1 866 916

2 761 395

5 116 228

4 491 924

5 407 990

101

Annex C - Streaming Revenue and Membership Information by Region

(in thousands, except for average revenue per membership and percentages)

Regional Information

2018

2019

2020

2021

2022

2023

United States and Canada (UCAN)

Revenues

$ 8 281 532

$ 10 051 208

$ 11 455 396

$ 12 972 100

$ 14 084 643

$ 14 873 783

DVD Revenues

$ 365 589

$ 297 217

$ 239 381

$ 182 348

$ 145 698

$ 82 839

Paid net membership additions

(losses)

6 335

2 905

6 274

1 279

(919)

5 832

Paid memberships at end of

period

64 757

67 662

73 936

75 215

74 296

80 128

Average paying memberships

61 845

66 615

71 689

74 234

74 001

76 126

Average revenue per

membership

$11,16

$12,57

$13,32

$14,56

$15,86

$16,28

% change as compared to

prior-year period

12%

13%

Europe, Middle East and Africa (EMEA)

Revenues

$ 3 963 707

$ 5 543 067

$ 7 772 252

$ 9 699 819

$ 9 745 015

$ 10 556 487

Paid net membership additions

(losses)

11 814

13 960

14 920

7 338

2 693

12 084

Paid memberships at end of

period

37 818

51 778

66 698

74 036

76 729

88 813

Average paying memberships

31 601

44 731

60 425

69 518

73 904

80 928

Average revenue per

membership

$10,45

$10,33

$10,72

$11,63

$10,99

$10,87

% change as compared to

prior-year period

14%

-1%

-6%

-1%

Latin America (LATAM)

Revenues

$ 2 237 697

$ 2 795 434

$ 3 156 727

$ 3 576 976

$ 4 069 973

$ 4 446 461

Paid net membership additions

(losses)

6 360

5 340

6 120

2 424

1 738

4 298

Paid memberships at end of

period

26 077

31 417

37 537

39 961

41 699

45 997

Average paying memberships

22 767

28 391

35 297

38 573

40 000

42 802

Average revenue per

membership

$8,19

$8,21

$7,45

$7,73

$8,48

$8,66

% change as compared to

prior-year period

-9%

10%

Asia-Pacific (APAC)

Revenues

$ 945 816

$ 1 469 521

$ 2 372 300

$ 3 266 601

$ 3 570 221

$ 3 763 727

Paid net membership additions

4 106

5 626

9 259

7 140

5 391

7 315

Paid memberships at end of

period

10 607

16 233

25 492

32 632

38 023

45 338

Average paying memberships

8 446

13 247

21 674

28 461

35 019

41 033

Average revenue per

membership

$9,33

$9,24

$9,12

$9,56

$8,50

$7,64

% change as compared to

prior-year period

-1%

-11%

-10%

102

Annex D – Key executives of Netflix and their role on the company

Name

Title

Mr. Reed Hastings

Co-Founder & Executive Chairman

Mr. Dan Lin

Chairman of Netflix film

Mr. Ted Sarandos

Co-CEO

Mr. Greg Peters

Co-CEO

Mrs. Bela Bajara

Chief Content Officer

Mr. Spencer Neumann

Chief Financial Officer

Mr. David Hyman

Chief Legal Officer

Ms. Rachel Whetstone

Chief Communications Officer

Mr. Sergio Ezama

Chief Talent Officer

Ms. Eunice Kim

Chief Product Officer

Ms. Marian Lee

Chief Marketing Officer

Ms. Elizabeth Stone

Chief Technology Officer

Mr. Spencer Wang

Vice President of Finance, Corporate Development & Investor Relations

Mr. Wade Davis

Vice President, Inclusion Strategy

Mr. Dean Garfield

Vice President, Public Policy

Mr. Mike Verdu

Vice President, Games

Mr. Pablo Perez de Rosso

Vice President, Finance & Strategy, Commerce, Studio, Product and Games

Mr. Francisco Ramos

Vice President, Content for Latin America

Mr. Larry Tanz

Vice President, Content for Europe, Middle East, and Africa

Ms. Minyoung Kim

Vice President, Content for Asia

Ms. Shweta Poojari

Head of Communications

Ms. Maria Ferreras

Global Head of Partnerships

103

Annex E - Overview of the largest institutional shareholders and mutual fund holders

Top Institutional Holders

% out

Vanguard Group Inc

8.42%

Blackrock Inc.

7.14%

FMR, LLC

5.07%

State Street Corporation

3.87%

Price (T. Rowe) Associates Inc

2.73%

Capital World Investors

2.71%

JP Morgan Chase & Company

2.15%

Capital International Investors

2.05%

Geode Capital Management, LLC

1.99%

Capital Research Global Investors

1.58%

Top Mutual Fund Holders

% out

Vanguard Total Stock Market Index Fund

3.17%

Vanguard 500 Index Fund

2.45%

Growth Fund of America Inc

2.06%

Invesco ETF Tr-lnvesco QQQ Tr, Series 1 ETF

1.91%

SPDR S&P 500 ETF Trust

1.21%

Fidelity 500 Index Fund

1.21%

iShares Core S&P 500 ETF

1.04%

JP Morgan Large Cap Growth Fund

0.92%

Vanguard Growth Index Fund

0.90%

Fidelity Contrafund Inc

0.89%

104

Annex F - Ratios Analysis of Peers

The values highlighted at orange were not used to compute the average and

median values due to the discrepancy of the values.

Profitability Ratios

ROE

ROA

ROIC

Amazon

17%

13%

Walt Disney

Warner Bros

-7%

-2%

Paramount

-6%

-2%

Apple

171%

28%

58%

Comcast

19%

10%

Average

13%

10%

14%

Median

17%

Efficiency

ACC

APP

AIP

CCC

Amazon

-30

Walt Disney

-23

Warner Bros

Paramount

Apple

-36

Comcast

-50

Average

-1

Median

-26

Leverage Ratios

Total Debt

/Total

Capital

Total Debt /

Total Equity

Interest

Coverage Ratio

Amazon

30%

43%

11,60

Walt Disney

29%

45%

4,52

Warner Bros

49%

95%

-0,18

Paramount

39%

63%

-0,43

Apple

70%

239%

40,75

Comcast

54%

117%

5,70

Average

45%

72%

10,33

Median

44%

63%

5,11

105

Liquidity Ratios

Current Ratio

Amazon

1,05

Walt Disney

1,05

Warner Bros

0,93

Paramount

1,32

Apple

0,88

Comcast

0,60

Average

0,97

Median

0,99

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