Netflix, Inc.

NFLX

RESEARCHER/ANALYST:
DATE: June

MEANING
Definition: Is it understandable, well within your Circle of Compe

NETFLIX
Netflix is the world’s leading streaming entertainment service with 183 million paid memberships in over 190 countries.
Members can watch as much as they want, anytime, anywhere, on any internet-connected screen.
Members can play, pause and resume watching, all without commercials or commitments.
In over 190 countries, Netflix members get instant access to great content. 
Netflix content will vary by region, and may change over time.
MISSION
“We promise our customers stellar service, our suppliers a valuable partner, our investors the prospects of sustained profitabl

MOAT
Definition: Does the company have sustainable competitive advantage ove
Is it INTRINSIC (it is built-in, or is in the nature of the company, the advantage cannot be separated from the compan
Is it DURABLE (expensive or difficult to overcome the intrinsic adva

List of Moats: which of these is the Moat of this company?

(google: "What is the competitive advantage of ______?")
1 Brand
2 Switching
3 Network Effects
4 Toll Bridge
5 Secrets
6 Price

Brand

The size of the company’s customer base has grown very fast during the recent years. A large customer base has translated in
intense competition in the online entertainment industry. However, Netflix is a customer centric brand and its customer focus
Now, Netflix is eyeing a larger chuck of regional customer base from the developing economies. It has increased its number of

Switching
- Netflix has also focused on providing a matchless user experience. It has used features that drive higher user engagement. Th
- Its excellent, easy to use and intuitive user interface is also an important reason that the brand is enjoying higher popularity
Secrets
Netflix’ focus has remained on consistently differentiating its services from its competitors. One of the central attractions of N
others’ content, Netflix is investing large sums each year on creating its own original content.

Reference : https://notesmatic.com/2019/03/netflix-sources-of-competitive-advantage/#:~:text=O

MANAGEMENT
Definition: Is the company run by owner/shareholder-oriented CEO, who has inte
RISKS OF THE BUSINESS
We offer a variety of stream
If our efforts to attract and retain members are not successful, our business will be
1
adversely affected. (page 5)
We acquire, license and pr
member

We record a provision for i

2 We are subject to taxation related risks in multiple jurisdictions. (page 8) results of operations using th
by applying enacted statut
financial statement carryin
bases as well as n

INVESTMENT THESIS or THREE REASONS TO OWN THIS COMP

1 Subscriber growth. It's no surprise that subscription-based business models rely on subscriber growth to increase
top line. Luckily for NFLX shareholders, Netflix is doing both, with standard subscription prices now at $
2 Expanding operating margins. Netflix's operating margins are increasing accordingly, growing from 10.2% in
3 Great management team. Reed Hastings has become one of the iconic CEOs of Silicon Valley and is universally re
company in 1991 at age 31. By 1995, he had taken the com
Reference: https://money.usnews.c

STORY INVERSION and its REBUTTAL

Reason not to buy #1
Netflix Struggles with Original Content for International Markets
Reference: https://www.forbes.com/sites/stephenmcbride1/2018/10/17/5-reasons
Rebuttal:

Netflix’s original movies and shows dominated across every category in both the US and abroad. Murder Mystery, which stars
countries, including Australia and Colombia. The third season of heist show Casa de Papel, meanwhile, topped t
Reference: https://www.bworldonline
Reason not to buy #2
Netflix Is Already Struggling to Acquire New Subscribers
Reference: https://www.forbes.com/sites/stephenmcbride1/2018/10/17/5-reasons
Rebuttal:

More than 15.7 million people signed up for Netflix in the first three months of the year, when the coronavirus started to disr
according to its first quarter earnings announcement on April 21
Netflix has 182.8 million subscribers, making it one of the world’s largest entertainment services. It added 2.3 million in the
million, and added 13.5 million internationally.

Reference: https://www.nytimes.c
 Netflix, Inc.
NFLX

RESEARCHER/ANALYST: Jane Eilyza G. Aballa

DATE: June 16 2020

ANING
ell within your Circle of Competence?

s in over 190 countries.

en.

ospects of sustained profitable growth, and our employees the allure of huge impact.”

OAT
le competitive advantage over its competitors?
e separated from the company; and is not typically characteristic of other competitors?)
to overcome the intrinsic advantage)

YES What industry standards makes it hard

YES What network effects dynamics make it
What is the toll bridge?
What are its proprietary technologies an
YES How does it compete with the lowest p

stomer base has translated into better financial performance and higher revenue. There is
brand and its customer focus has worked to grow its consumer base from around the world.
It has increased its number of programs in regional languages to win the local Asian customers.

ve higher user engagement. This has also led to higher popularity and customer loyalty.
is enjoying higher popularity and customer loyalty.
 of the central attractions of Netflix is the large volume of original content. Apart from licensing

mpetitive-advantage/#:~:text=Original%20content,creating%20its%20own%20original%20content.

GEMENT
er-oriented CEO, who has integrity, talent, and honest
HOW THEY MANAGE THE RISK
We offer a variety of streaming membership plans, the price of which varies by country and the
features of the plan (page 25)

We acquire, license and produce content, including original programing, in order to offer our
members unlimited viewing of entertainment (page 38)

We record a provision for income taxes for the anticipated tax consequences of our reported
results of operations using the asset and liability method. Deferred income taxes are recognized
by applying enacted statutory tax rates applicable to future years to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases as well as net operating loss and tax credit carryforwards. (Page 38)

EASONS TO OWN THIS COMPANY

subscriber growth to increase revenue. Other than raising prices, that's the only way to grow the
d subscription prices now at $12.99 a month for its standard plan, the most popular.
dingly, growing from 10.2% in the first quarter of 2019 to 16.6% in the first quarter of 2020.
on Valley and is universally regarded as an extremely competent executive. He founded his first
y 1995, he had taken the company public.
ence: https://money.usnews.com/investing/articles/pros-and-cons-of-buying-netflix-inc-nflx-stock

N and its REBUTTAL

bride1/2018/10/17/5-reasons-netflix-is-a-dead-stock-heres-what-to-buy-instead/#4c8419122085

. Murder Mystery, which stars Adam Sandler and Jennifer Aniston, was the No. 1 program in nine
de Papel, meanwhile, topped the charts in six countries, including Spain and Israel.
ce: https://www.bworldonline.com/original-content-was-netflixs-top-international-draw-in-2019/

bride1/2018/10/17/5-reasons-netflix-is-a-dead-stock-heres-what-to-buy-instead/#4c8419122085

he coronavirus started to disrupt daily life around the world. That was a record for the streamer,
gs announcement on April 21, 2020.
ces. It added 2.3 million in the United States and Canada in the first quarter for a total of 69.9
5 million internationally.

rence: https://www.nytimes.com/2020/04/21/business/media/netflix-q1-2020-earnings-nflx.html
ustry standards makes it hard to switch?
work effects dynamics make it hard to duplicate? How many users?
he toll bridge?
its proprietary technologies and patents?
it compete with the lowest price? What structure, organization?
RULE #1 Valuation Methods
Research Analyst: Jane Eilyza G. Aballa

Name of Company: Netflix, Inc.

Date: June 16 2020
Number of Shares Outstanding (diluted) 451,765,000

BIG FIVE NUMBERS: (must growing at 10% per year consistently for 10 years, compare them to 1-year, 3-year, 5-year if its slow
Looking at the Growth Rates of these companies (percentages)
Source: MSN Money or Yahoo Finance
(source: FINBOX.com/ MacroTrends.net/Ycharts.com/Macroaxis.org)

NFLX= 2019 10-Year

1. Return on Invested Capital (growth rate) 29.90%
2. Sales (growth rate) 33.93%
3. Earnings per Share (growth rate) 50.0%
4. Equity (growth rate)
5. Free Cash Flow (growth rate)

* It is important to compare this against competitors in its market segment. E.g. Dell vs. Gateway; Walmart vs. Target vs. Cos

OWNER EARNINGS METHOD:

Definition: Profit Plus Changes in cash minus the cost to sustain the business (deducting cost of annual replacement expenses
Net Profit $ 1,866,916,000
+ Depreciation & Amortization $ 103,579,000
+ Net Change in Accounts Receivable $ -
+Net Change in Accounts Payable $ 96,063,000
+ Income Tax $ 400,658,000
+ Maintenance Expenditures (this is a negative number,-$ 13,916,683,000
= OWNER EARNINGS (SUM TOTAL) -$ 11,449,467,000

TEN-CAP METHOD:
= OWNER EARNINGS (SUM TOTAL) -$ 11,449,467,000
Ten-Cap Price -$ 114,494,670,000

PAYBACK TIME METHOD

Definition: Free cash flow, grown by the compounded Growth Rate for eight years.
Why 8 years? Charlie Munger says a fair price is about half of what the same private company would sell for a public company
Public companies sell for about twelve to twenty years of free cash flow, about 16 years on average. Half of sixteen years is 8

Net Cash provided by Operating Activities $ 2,887,322,000

+ Purchase of Property and Equipment (a negative num-$ 13,916,683,000
+ Any Other Capital Expenditures for maintenance and -$ 192,084,000
= FREE CASH FLOW (more accurate) -$ 11,221,445,000

Net Earnings or Net Profit $ 1,866,916,000

+ Purchase of Property and Equipment (a negative num-$ 13,916,683,000
+ Any Other Capital Expenditures for maintenance and -$ 192,084,000
= FREE CASH FLOW (less accurate) -$ 12,241,851,000

Free Cash Flow

Year 0 -$ 11,221,445,000
Year 1 -$ 14,466,012,419
Year 2 -$ 18,648,713,717
Year 3 -$ 24,040,800,825
Year 4 -$ 30,991,955,429
Year 5 -$ 39,952,966,139
Year 6 -$ 51,504,962,536
Year 7 -$ 66,397,101,948
Year 8 -$ 85,595,152,971

MARGIN OF SAFETY METHOD:

Definition: Price of company within 10 years, accounting for Growth in EPS and PE multiple. Then discounted to present day, t
Encode this number
1. Earnings per Share (TTM EPS) $ $ 4.13

2. Growth Rate of EPS

a) Historical growth rates from year 2010-2018: 28.91%
b) Analyst average five-year growth estimate: 30%
c) The lower of 28.91% and 30% is: 28.91%

Therefore the Growth Rate is: 28.91%

3. Price to Earnings Ratio 57.83%

(Rule of thumb: Growth Rate% X 2 = PE)
NFLX had a range of P/E Ratios of 16.26 to 450.67 over the last ten years. The high was 450.67 PE.
Average PE is 233.465
Therefore PE is 233.465
Current PE Netflix Inc. is 78.35

4. Minimum Acceptable Rate of Return (MARR) 15%

Step One:
EPS x (1+ Growth Rate) (repeated 10 times)
= Future 10-Year EPS
Future - EPS
Year 0 $ 4.13
Year 1 $ 5.32
Year 2 $ 6.86
Year 3 $ 8.85
Year 4 $ 11.41
Year 5 $ 14.70
Year 6 $ 18.96
Year 7 $ 24.44
Year 8 $ 31.50
Year 9 $ 40.61
Year 10 $ 52.35

Future 10- Years EPS: $ 52.35

Step Two:
Future 10-Year Earnings Per Share X PE $ 52.35
= Future 10-Year Share Price $ 12,222.85

Step Three: Sticker Price

Future 10-Year Share Price / (1.15) Years = /4 $ 3,055.71
What is the future 10-Year share Price at a MARR of 1 $ 3,021.30

Excel Present Value Formula $ 3,021.30

=PV (rate, nper, pmt,[fv],type)

Step Four: Margin of Safety Price

Sticker Price / 2 [or 50% Margin of Safety] $ 1,527.86
Benjamin Graham's MOS Formula (countercheck) $ 1,527.86

Company Valuation: $ 1,364,917,795,087.21

ASSET METHOD:
What are the value of the assets? Cash, Land, etc., apart from its Profits or Earnings

Number of Shares Outstanding: 451,765,000

Price as of Date: June 16 2020 $ 429.91

Market Capitalization $ 194,218,291,150

ASSETS - Look Out

Cash (Balance Sheet) $ 5,018,437,000
Cash per Share $ 38.70

Property and Equipment,net $ 565,221,000

PPE per share $ 1.25

LIABILITIES - Watch Out

Long term Debt $ 1,475,926,000
Long term Debt per Share $ 3.27

Altman Z-Score
When Z-Score is less than 1.81
When Z-Score is greater than 2.99
When Z-Score is between 1.81 and 2.99
 SUMMARY DASHBOARD

Total Price of Business Price per Share

Ten-Cap Method -$114,494,670,000.00 -$253.44
Payback Time 8 Years -$85,595,152,971.24 -$189.47
Margin of Safety Method (Sticker Price) $1,364,917,795,087.21 $3,021.30
Margin of Safety Price $1,510.65

shares (source: NFLX 10-K 2018) p.22

ompare them to 1-year, 3-year, 5-year if its slowing down)

MacroTrends.net/Ycharts.com/Macroaxis.org)

5-Year 3- Year 1-Year 2019

2.97% 7.2% 10.2%
22.8% 32.6% 30.6%
156.25% 190.7% 54.1%

g. Dell vs. Gateway; Walmart vs. Target vs. Costco vs. Amazon(?)

deducting cost of annual replacement expenses)

2019 Cash Flow Statement Line 2; page 54
2019 Cash Flow Statement Line 7

2019 Cash Flow Statement Line 14

2019 Cash Flow Statement Line 37
2019 Cash Flow Statement "Additions to Streaming Content Assents" Line 18
(add them whether they are negative or positive numbers)

Note: Ten-Cap price does not take into account growth rates of the company. It only accounts for Owner Earnings in 2019
rivate company would sell for a public company.
16 years on average. Half of sixteen years is 8 years.

2019 Cash Flow Statement Line 18

2019 Cash Flow Statement "Additions to Streaming Content Assents" Line 18
2019 Notes to Consolidated Financial Statements "Leases"; Page 69

2019 Cash Flow Statement Line 2; page 54

Expected Growth in Free Cashflow Cumulative Free Cash Flow

Growth Rate to be applied the next Year and Payback Time Buy Price
28.91% -3244567418.57132 -$ 11,221,445,000
28.91% -4182701298.26814 -$ 14,466,012,419
28.91% -5392087108.56056 -$ 18,648,713,717
28.91% -6951154603.92626 -$ 24,040,800,825
28.91% -8961010709.74428 -$ 30,991,955,429
28.91% -11551996397.0871 -$ 39,952,966,139
28.91% -14892139411.5957 -$ 51,504,962,536
28.91% -19198051023.4857 -$ 66,397,101,948
28.91% -24748973462.6967 -$ 85,595,152,971

d PE multiple. Then discounted to present day, then 50% margin of safety

Source:
Macrotrends.net (2019-12-31)

FY 2018
Macrotrends.net (Calculated compounding) 3.21
Zacks.com 63%

high was 450.67 PE.

Macrotrends.net(31/12/2019)

(if we want to change this %, it will increase the hurdle rate or lower it)
increasing this hurdle rate, will lower the Estimated Value of the company
which increases the effective Margin of Safety

1 + Growth Rate
128.91%
128.91%
128.91%
128.91%
128.91%
128.91%
128.91%
128.91%
128.91%
128.91%
128.91%

233.465
ESTIMATED VALUE OF COMPANY in 10 YEARS
2019 Balance Sheet Statement Line 3; page 55

2019 Balance Sheet Statement Line 8

2019 Balance Sheet Statement Line 19 Debt went up from $410,360,058,000 in 2018 WHY?
 Meaning Moat Mgmt
100 80 85

Date Symbol Price

01/16/2020 NFLX $338.62

Source: Ycharts.com Dec-13 Dec-14

ROIC % 17.08% 17.08%

Source: Ycharts.com Dec-13 Dec-14

EPS 0.299 0.62
EPS % 107%

Source: Ycharts.com Dec-13 Dec-14

Free Cash Flow Yield % -0.10% -0.61%

or Owner Earnings in 2019

me Buy Price

<= 8 Year Payback Time Buy Price

Company Valuation

FY 2017 FY 2016
1.97 1.92
3%

Source: Macrotrends.net
Date Stock Price TTM Net EPS PE Ratio
6/15/2020 425.5 86.13
3/31/2020 375.5 $4.94 76.01
12/31/2019 323.57 $4.13 78.35
9/30/2019 267.62 $3.13 85.5
6/30/2019 367.32 $2.55 144.05
3/31/2019 356.56 $2.80 127.34
12/31/2018 267.66 $2.68 99.87
9/30/2018 374.13 $2.79 134.1
6/30/2018 391.43 $2.19 178.74
 3/31/2018 295.35 $1.49 198.22
12/31/2017 191.96 $1.25 153.57
9/30/2017 181.35 $0.99 183.18
6/30/2017 149.41 $0.82 182.21
3/31/2017 147.81 $0.76 194.49
12/31/2016 123.8 $0.42 294.76
9/30/2016 98.55 $0.37 266.35
6/30/2016 91.48 $0.32 285.88
3/31/2016 102.23 $0.29 352.52
12/31/2015 114.38 $0.28 402.32
9/30/2015 103.24 $0.38 273.7
6/30/2015 93.85 $0.44 211.23
3/31/2015 59.53 $0.55 108.51
12/31/2014 48.8 $0.62 79.07
9/30/2014 64.45 $0.53 120.63
6/30/2014 62.94 $0.47 133.5
3/31/2014 50.29 $0.38 133.32
12/31/2013 52.6 $0.26 201.21
9/30/2013 44.17 $0.17 259.84
6/30/2013 30.16 $0.11 263.83
3/31/2013 27.04 $0.06 450.67
12/31/2012 13.23 $0.04 318.73
9/30/2012 7.78 $0.13 61.14
6/30/2012 9.78 $0.27 35.67
3/31/2012 16.43 $0.44 37.47
12/31/2011 9.9 $0.61 16.26
9/30/2011 16.18 $0.63 25.74
6/30/2011 37.53 $0.56 66.67
3/31/2011 33.97 $0.50 68.32
12/31/2010 25.1 $0.42 59.35
9/30/2010 23.17 $0.38 61.19
6/30/2010 15.52 $0.35 43.98
3/31/2010 10.53 $0.32 33.37
12/31/2009 7.87 $0.28 27.68
9/30/2009 6.6 $0.26 25.51
6/30/2009 5.91 $0.23 25.52
3/31/2009 6.13 $0.21 28.61
12/31/2008 4.27 $0.19 22.31
9/30/2008 4.41 $0.17 25.74
6/30/2008 3.72 $0.16 23.69
3/31/2008 4.95 $0.13 37.25
12/31/2007 3.8 $0.12 30.94
9/30/2007 2.96 $0.12 24.99
6/30/2007 2.77 $0.11 24.87
3/31/2007 3.31 $0.11 30.12
12/31/2006 3.69 $0.10 36.94
Min 16.26
Max 450.67
 Predictability Rule #1 Score
70 84

Change Change% Sticker MOS

$ 91.29 26.96%

Dec-15 Dec-16 Dec-17 Dec-18

16.19% 15.13% 10.34% 9.36%

Dec-15 Dec-16 Dec-17 Dec-18

0.28 0.43 1.25 2.68
-55% 54% 191% 114%

Dec-15 Dec-16 Dec-17 Dec-18

-1.84% -2.40% -2.49% -2.36%
Source: Macrotrends.net
Netflix Annual EPS Growth
2019 4.13 54.10%
2018 2.68 114.40%
2017 1.25 190.70%
2016 0.43 53.57%
2015 0.28 -54.84%
2014 0.62 138.46%
2013 0.26 550.00%
2012 0.04 -93.22%
2011 0.59 40.48%
2010 0.42
 PBT

Dec-19
8.34%

Dec-19
4.13
54%

Dec-19
-2.15%
Compounding Calculated Compounding %
4.13 28.91%
3.20
2.49
1.93
1.50
1.16
0.90
0.70
0.54
0.42