NETFLIX: Battling to survive increase competition in the market

I initiate coverage on NETFLIX with a SELL recommendation based on a target price of Netflix Inc.
US$103, implying a downside of 65.4%. I derive my target price from a DCF-based
valuation using a WACC of 11.6% and a terminal growth rate of 2%. Recommendation: SELL
Current price: US$298
Highlights: Target price: US$103
• NETFLIX has a strong future despite intense competition Up/(downside): (65.4%)
• NETFLIX’s new ads-supported plan could be the driver of positive revenue growth
• Gaming may be a growth avenue for Netflix
Risks: Increased competition, Rising content acquisition costs may jeopardize Netflix's Stock data
ability to produce quality content, and Technological risks threaten Netflix's ability to
RIC code NFLX.O
deliver seamless streaming services, Regulatory risks pose a threat to Netflix's
Index .INX
compliance and could lead to legal actions
Kowiyu A. Gbadegesin S&P 500 (9 March 2023) 3,918.32
[email protected] Market cap (US$ m) 134,745
Shares outstanding (million) 452
Valuation table
Please refer to the important Par (US$) 10.38
Year end Dec 21A 22A 23E 24E 25E
disclaimer and disclosures at PE (x) 29.7 33.8 27.6 24.5 22.5
the end of the report. Recurring net profit growth (%) 9.5 (13.0) 23.0 12.7 9.3
Recurring EPS (US$) 10.0 8.8 10.8 12.1 13.2
Recurring EPS growth (%) 9.2 (12.2) 22.7 12.4 9.1
PBV (x) 8.3 6.4 5.2 4.3 3.7
BVPS (US$) 35.7 46.7 57.0 68.5 81.1
ROE (%) 38.0 24.5 21.2 19.6 18.0
DPS (US$) - - 0.5 0.6 0.7
Dividend yield (%) na na 0.2 0.2 0.2
Enterprise value (US$ m) 144,110.4 143,040.0 137,856.6 132,718.7 128,737.9
EV-to-EBITDA (x) 7.7 7.2 12.6 7.9 8.1

12 May 2021 1
NETFLIX: Leading streaming media company

NETFLIX has a strong future despite intense competition

Story Since Netflix’s market valuation peak in late 2021, the company has seen a substantial drop to its current
market valuation of $140 billion. The market has punished NFLX as a result of a decline in subscriber

Sales growth rate and intense competition in the space with leading technology companies such as Amazon,
Disney, and Warner Bros. Discovery (WBD), etc. making big investments in order to gain market share.
 Despite these headwinds, NFLX continues to develop its strategies to gain more subscribers and boost
revenues, this is visible with the company's recent deployment of its advertising revenue model.
FVMR Furthermore, the projected market size for the streaming services market stands to be $137B by 2027, which
provides NFLX with a long runway for growth.

P5F NETFLIX’s new ads-supported plan could be the driver of positive revenue growth Background: NETFLIX was created in the year
Netflix reveal a preview of its new ads-supported tier, ”Basic with Ads”, which was launched on November 3 1997 by two entrepreneurs Marc Randolph and
Reed Hastings and headquartered in Los Gatos
Team in 9 countries, including the US and cost $6.99 per month. The new pricing is less expensive than ads-
supported Disney+ and Hulu, which will both be $7.99 per month. This will mean that any customer who California with a presence in over 190 countries
switches to ads-supported service from the ads-free basic plan will have a neutral to a positive effect on the across the world.
company’s revenue. Also, that suggests NFLX will get at least $3 a month per user in advertising. This could
WCB mean that NFLX will generate between $2B and $4B in ad sales per year.
It is one of the world’s leading entertainment
services in the world with over 231 million paid
Gaming may be a growth avenue for Netflix members enjoying TV series and films and games
across a variety of genres and languages. It
ESG NETFLIX is slowly testing the waters for its entry into gaming. The company seeks to extend the content initially operate a DVD rental service in the USA.
life-cycle by supplementing it with gaming. In March, the company made an offer to acquire Next Games for In 2007, It introduced streaming media and Video
EUR63.1m as their entry into the gaming market tarts taking ground. The advantage of connecting content on demand which has now grown to be its highest
Value with gaming is to allow the conversation around content to keep going and engage clients for a longer
period - possibly between seasons. mobile games are growing in popularity and the advancement of
revenue source. It has a market share of less than
50% in the Streaming industry.
technology is shortening the development time. With Netflix owning the rights of their original content, and
Risks design resources that can easily be translated onto the mobile screen, it is possible to make this into a higher
return venture.

Sources: A. Stotz Investment Research, company data 12 May 2021 2

NETFLIX: Constraints to growth are neutral

Constraints to growth analysis (Major / Neutral / Minor)

Story A company needs to grow to increase profits and share price appreciation. Management’s core financial
mission is to deliver this growth to increase value to shareholders. Since growth is key, we like to consider
constraints to growth rather than commonly discussed growth opportunities. We see four main ingredients:
Sales capital, operations, market, and people; we rank them from major constraint to minor constraint.
Capital (Major)
NETFLIX operates with much debt and net cash. Its cash conversion cycle has declined in 2020 from 141
FVMR days to 108 days, in 2022. Given its weak capital structure and the cash-to-asset ratio of 14%, I can see
access to capital as a constraint to expanding the plan.

P5F Operations (Neutral)

NETFLIX’s operation depends on its ability to provide its member around the globe with compelling content
to keep and grow its membership. Thus, it relies on the content provider and studio for a content streaming
Team license. It also relies heavily on AWS for its cloud computing service. Any disruption with the use of AWS
could adversely affect its operation .
Market (Neutral)
WCB As can be seen in the newly reported markets of Mexico, Brazil, and Poland, it’s less than 5% of TV viewing
in 2022. And in its largest markets like the US and the UK, it’s still less than 10% of TV screen time. The
entertainment market is intensely competitive. Through new and existing distribution channels, consumers
ESG have increasing options to access entertainment videos. Piracy also threatens to damage its business, as its
fundamental proposition to consumers is so compelling and difficult to compete against. Virtually all
content for free, and in light of the compelling consumer proposition, piracy services are subject to rapid
Value global growth.
People (Major)
Netflix relies on the continued service of its senior management. In the industry, there is substantial and
Risks continuous competition for highly-skilled business, product development, technical, creative and other
personnel. Source: Nielsen (US, Mexico, Poland), Kantar (Brazil), BARB (UK)

Sources: A. Stotz Investment Research, company data, CHN/ITAL370W, Refinitiv 12 May 2021 3
NETFLIX: Revenue structure
Netflix Inc. is one of the world’s leading entertainment services. It is a streaming Platform (US$ bn) (%)
that offers TV series, films and games with approximately 231 million paid memberships
Story in over 190 countries across a wide variety of genres and languages. It generates its 70 20
revenue from two sources which are Paid membership subscriptions from streaming and 60
DVD rental in the United state only. 15
Sales In the 2022 FY, its total revenue was US$31.6B which is a 6.5% increase year over year
50
40
relative to the previous year 2021. Streaming revenue is the major revenue source of the 10
entity which accounted for 99.5% of its total revenue which is a 7% increase YOY relative 30
P5F to FY2021. DVD rental in the US accounted for 0.5% of the total revenue of the entity
which is a 20% decrease YOY relative to FY2021.
20 5
10
As regards, the geographical breakdown of its revenue source, the United State and
- -
Team Canada is the major source which accounted for 45%(This is inclusive of DVD rental in
United state) followed by EMEA which accounted for 31% of the total revenue. Latin 20A 21A 22A 23E 24E 25E
America accounted for 13% while Asian Pacific accounted for 11% of its total revenue in Revenue Net margin (RHS)
the Financial year 2022.
WCB Revenue breakdown, by Revenue source and Geography 2022
Streaming Revenue 99.5% DVD Rental 0.5% Revenue by Geography
ESG
11%
US & Canada(UCAN)

Value 13%
45%
Europe, Middle East
& Africa(EMEA)
Latin
America(LATAM)
Asian Pacific(APAC)
Risks 31%

Sources: A. Stotz Investment Research, company data, Refinitiv

4
 NETFLIX: A. Stotz Four Elements

Overall: NETFLIX appears less

Story Worst Neutral Best attractive relative to 2050 non-
financial companies in the USA
Rank relative to peers*
considering Fundamentals,
Sales Valuation, Momentum, and Risk.

Fundamentals W B Valuation W B

Fundamentals: Ranked in the 50

FVMR decile in the USA due to volatile
profitability as a result of
fluctuating margin
P5F
Valuation: Ranked worst with
Team extremely high PE and high on PB
relative to its peers in the USA.

WCB Momentum W B
Risk W B Momentum: is above average as
fundamental delivered average
results but drag down by high price
ESG
Risk: The balance sheet risk is low,
Value as TFMAMA is net cash. Price risk
measured in terms of beta to the
United State of America market is
Risks Note: Benchmarking against 2,050 non-financial companies in the USA.
high as well.

Sources: A. Stotz Investment Research, Refinitiv. Notes: *Bars are decile rankings of the most recent period. **Past 12 months of published data. na = not available, nm = not meaningful.
BESPOKE RESEARCH | Valuation is based on historical prices. 12
12 May
May 2021
2021 5
5
NETFLIX: An intensely Competitive Industry

Ranking (100% is best) 49% Rivalry among competitors 60%

Story
NFLX Score
Sales
Rivalry among competitors 60
Are there many competitors of roughly equal size? 2
FVMR Netflix is competing with more than 15 companies in the
streaming industry. However, the biggest four biggest
companies that are threatening its market share are Amazon
Prime Video, Apple TV, Hulu, and Disney Plus with Amazon
P5F Bargaining power vs. suppliers 53 Prime Video is almost close to Netflix’s market share.

Is it a slow growth industry? 4

Tea Bargaining power vs. With the increased adoption of online social media platforms
33
m customers and rising internet connectivity, the market has seen high
WCB growth recently. Also the increase, in video data traffic
around the globe owing to the better-resolution video has
propelled it.

ESG Threat of new entrants 47 Is there some technological disruption going on within the
industry?
3

Valu With the advent of wireless Internet and smartphones,

consumers wanted to stream videos on the go and on-
Threat of substitutes 53 demand .
e
Risks (%)
Unattractive Attractive

12 May 2021 6
NETFLIX: Switching Cost is low

Bargaining power vs. suppliers 53% Bargaining power vs. customers 33%
Story
Score Score
Sales Do the suppliers have strong control of inputs that the
company needs?
1 Do the customers have many alternatives? 1
FVMR Netflix major input is compelling Content assets. It highly Because of the nature of the entertainment industry,
depends on studios, content providers and other rights members of Netflix can choose in their leisure time
holders for licensed streaming content. So, if content
P5F provider develops their own streaming service, they may be
unwilling to give access to their content.
alternative entertainment means like video games, traditional
entertainment video providers like cable network operators
etc and social media like Tiktok etc.

Tea Is it hard for the company to switch from one supplier’s

products to the other?
4 Can the customers put pressure on the supplying
companies?
2
m The success of Netflix in growing and keeping its new and
WCB existing members depend on compelling content that
engages it, member. So, it is selective in its choice of content
The ability of Netflix to acquire and retain new and existing
members depends on offering them compelling and engaging
provider which thus made it easy to switch content provider content at a resealable price. If they did not perceive their
ESG service offering as valuable, adjusting existing features or
service offerings, it might fail to retain or acquire customers.
Would it be difficult for the company to backward integrate
and eliminate the supplier?
3 Are the customers price sensitive? 2
Valu
With the nature of its business, the entity acquires or invests
e in businesses, content and technologies that impact its
Any adjustment in its pricing may lead to losing the customer

Risks business. However, it may encounter difficulties in integrating

solutions, operations and personnel into its operation.
to competitors especially if they find the content not
compelling or of no value.

12 May 2021 7
NETFLIX: Risk of many substitutes.

Threat of new entrants 47% Threat of substitutes 53%

Story
Score Score
Sales Is it easy for any company to enter the industry? 2 Are the customer’s switching costs low? 3
FVMR The industry is not capital intensive and with the scalability of The market for entertainment is dominated by different forms
business in the industry, it is easy for a new company to of entertainment like video, games, social media like Tiktok
penetrate and gain a competitive position that shifts the etc. if customers find the content compelling at aggressively
P5F attention of customers to it. lower cost, they may switch to it.

Tea
Can any company get access to raw materials and labor
inputs of the process and start the business?
3 Is there little perceived difference in products? 2
The industry is characterized by substantial and continuous A consumer might perceive compelling and quality content
m competition for highly skilled business, product development,
technical, creative and other personnel. Getting creative and
and a strong desire for the brand. Netflix tries to differentiate
its content from a competitor by providing original and
highly qualified content creators might be difficult to get. compelling content to its member.

WCB Could new entrants easily reach economies of scale to 2

match current competitors’ costs? Are there new competitors that can “leapfrog” current
competitors’ business model?
3
ESG If the new entrants could consistently provide engaging and
compelling content, it might easily shift their attention from Advanced technology aids in enhancing profitability and cost.
competitors toward it and reach economies of scale. If a new competitor could introduce modern technology to
deliver content to the consumer in an efficient way, it would
Valu force other companies to adopt the technology to remain in
the business.

e 12 May 2021 8
NETFLIX: Leadership and ownership

Board composition
Story
NFLX USA North America

Sales 12
11
10 10

FVMR 8
7

P5F President/Chairman/Co-CEO Co-CEO 0.833333333

0.7272727272
Reed Hastings Ted Sarandos 33333372727 0.7

Team Number of Directors Number of Independent Directors Independent Director(%)

Ownership
WCB Top 5 Shareholder % of O/S Institutional Ownership(%)
The Vanguard Group, Inc. 7.55
ESG BlackRock, Inc.
Capital Research Global Investors
6.58
5.84
The Vanguard Group, Inc.
Capital Research Global Investors
BlackRock, Inc.

Reed Hastings 1.7 8.64

7.55 7.49 7.59
Value Jay C. Hoag
Total Top 5 shareholders
0.004
22
6.58
5.84 6.48 6.82 6.18

Total Institutional Ownership 20

Risks Total Executive and Director Ownership(18people)
Estimated free float
2.4
78 2022 2021 2020

12 May 2021 9
 Netflix: A. Stotz Profitable Growth

Profitable Growth consistently ranked in the

Story top 20% among 270 large Communication
service companies globally from 2019 until the
past twelve months, improving since 2018.
Profitability has ranked in the top 20% from
Sales 2019 till the past twelve months except in 2021
which is ranked #1 from #2 and in 2018 which
is ranked #3.
Asset efficiency has ranked #3 from 2018 till
FVMR 2019 and moved up to #2 till 2021 and later
came back to #3 in the past twelve months.
Expense control has pretty stay consistent at #3
since 2019. Although, It moved up to #2 in
P5F 2021 and later come down to #3 recently. Both
Asset efficiency and expense control has shown
Great World Class performance consistently and
Poor growth comprised the main driver of the overall
profitability
Team Profitable Growth rank.
Sales growth has consistently ranked best until
2021 which moved to #2 from #1 and
eventually ranked slightly above average
WCB recently. Expense direction has been volatile; it
dropped to #9 from #5 in the past twelve
months. Both had contributed a slight drag in
the growth recently.
ESG

Value

Risks

Source: A. Stotz Investment Research. Notes: 1 = top ranking and 10 = worst. Most recent year’s data is based on the past 12 months (PTM) of published data. 12
12 May
May 2021
2021 10
10
NETFLIX: Environmental

Overall ESG Score (100% is best): 67% Environmental 80%

Story
Social 60% Governance 60%
Sales
Environmental Yes/No?
FVMR Does the company have a resource reduction policy? Yes
The company aims to reduce 46% of scope 1 and scope 2 emissions by 2030. It reduces or avoided 14,000MT of greenhouse gas emissions in 2021

P5F Has the company faced any environmental controversies? No

None found.
Team Does the company have an emissions/waste policy? Yes

WCB It has designed its 2030 decarbonization roadmap as part of its low-carbon transition planning process

Is the company engaged in emissions trading or any other way tries to reduce its climate footprint? Yes

ESG Netflix’s footprint in 2021 was 1.53 million metric tons

Does the company have any environmental, eco, "green," or organic products? No
Value Netflix product is intangible

Risks
12 May 2021 11
NETFLIX: Social

Overall ESG Score (100% is best): 67% Environmental 80%

Story
Social 60% Governance 60%
Sales
Social Yes/No?
FVMR Does the company have any health & safety policy? No

Not found

P5F Does the company have a human rights policy? Yes

The company’s policy towards employees is based on the fundamentals of human rights.
Team Does the company have a fair competition policy, e.g., anti-corruption, anti-bribery, business ethics? No

WCB Not found

Has the company implemented quality management systems? Yes

ESG Netflix Branded Content is QCed by a vetted Netflix Branded Content QC Partner after delivery to Netflix. All error codes and reports are verified to validate the
actionability of an issue. Actionable reports are sent back to the delivery and Post teams to get issues fixed.
Does the company derive any revenue from weapons, alcohol, gambling, tobacco, or pornography? No
Value This is not the case.

Risks
12 May 2021 12
NETFLIX: Governance

Overall ESG Score (100% is best): 67% Environmental 80%

Story
Social 60% Environmental 60%
Sales
Governance Yes/No?
FVMR Does the company have board independence in line with or above the country average? Yes

At NETFLIX, the Majority of directors are independent, which is in line with the legal minimum requirement in the United State of America.

P5F Is the Chairman also CEO (or equivalent)? Yes

Yes, the positions of Chairman and CEO are occupied by two people who are also members of the board of directors.
Team Does the company have any shareholder rights policy? No
No, it is just seeking proposals to provide common stockholders owning a specified percentage of the Company’s outstanding stock the right to require the Company
WCB to call a special meeting of stockholders
Does the company have any insider dealings or accounting controversies? No

ESG None found. Management and relevant employees are prohibited from engaging in any transactions involving any hedging or derivatives of Company equity
securities
Does the company have any CSR sustainability or ESG reporting? Yes
Value The ESG reports are available on the company investor relation website under the Environmental, Social and Environmental section.

Risks
12 May 2021 13
NETFLIX: Profit and loss statement

Story Actual Forecast

(YE Dec, US$ m) 2020A 2021A 2022A 2023E 2024E 2025E 2026E 2027E
Sales Revenue
Cost of goods & services
24,996
(14,175)
29,698
(17,333)
31,616
(19,168)
34,616
(20,735)
37,801
(22,643)
40,409
(24,205)
43,197
(25,875)
46,178
(27,660)
Gross profit 10,821 12,365 12,447 13,881 15,158 16,204 17,322 18,517

FVMR SG&A
Other operating (exp)/inc
(5,134)
(0)
(6,171)
-
(6,814)
0
(7,477)
-
(8,165)
-
(8,728)
-
(9,331)
-
(9,974)
-
EBIT 5,686 6,195 5,633 6,404 6,993 7,476 7,991 8,543
Interest expense (net) (726) (757) (651) (572) (423) (293) (191) 41
P5F Other non-operating inc/(exp) - - - - - - - -
Earnings before taxes (EBT) 4,960 5,437 4,982 5,832 6,570 7,183 7,801 8,584
Income tax (525) (979) (1,141) (945) (1,064) (1,164) (1,264) (1,391)
Team Earnings after taxes (EAT) 4,435 4,458 3,841 4,887 5,506 6,019 6,537 7,193
Equity income/Minority interest - - - - - - - -
Earnings from cont. operations 4,435 4,458 3,841 4,887 5,506 6,019 6,537 7,193
WCB Forex/Exceptionals before tax (1,674) 658 651 - - - - -
Net profit 2,761 5,116 4,492 4,887 5,506 6,019 6,537 7,193
Earnings per share adjustments
ESG Net profit 2,761 5,116 4,492 4,887 5,506 6,019 6,537 7,193
Less: Preferred share dividend & other adj. - - (0) - - - - -

Value Net proft attributable to common shares

Add: Exceptional items after tax
2,761
852
5,116
(214)
4,492
(294)
4,887
-
5,506
-
6,019
-
6,537
-
7,193
-
Add: Foreign exchange loss/(gain) after tax 555 (338) (225) - - - - -

Risks Recurring profit after tax

Recurring FDEPS (US$)
4,168
9.2
4,564
10.0
3,973
8.8
4,887
10.8
5,506
12.1
6,019
13.2
6,537
14.4
7,193
15.8

Sources: A. Stotz Investment Research, company data, Refinitiv

12 May 2021 14
NETFLIX: Balance sheet - Assets

Story Actual Forecast

(YE Dec, US$ m) 2020A 2021A 2022A 2023E 2024E 2025E 2026E 2027E
Sales Cash & short-term investments 8,206 6,028 6,058 8,371 11,213 13,356 16,821 20,863
Accounts receivable 611 804 989 913 998 1,066 1,140 1,219
FVMR Inventories
Other current assets
-
945
-
1,238
-
2,219
-
2,112
-
1,588
-
1,697
-
1,814
-
1,939
Total current assets 9,762 8,070 9,266 11,396 13,798 16,120 19,775 24,021
P5F Long-term investments - - - - - - - -
Net fixed assets 2,998 3,770 3,625 4,367 5,346 6,663 8,338 10,470
Team Intangible assets 25,384 30,920 32,737 33,173 33,505 34,518 34,718 34,840
Goodwill - - - - - - - -
Other long-term assets 1,137 1,825 2,966 3,028 3,213 3,249 3,317 3,386
WCB Total assets 39,280 44,585 48,595 51,965 55,861 60,549 66,148 72,718

ESG
Value
Risks
Sources: A. Stotz Investment Research, company data, Refinitiv
12 May 2021 15
NETFLIX: Balance sheet - Liabilities and equity

Story Actual Forecast

(YE Dec, US$ m) 2020A 2021A 2022A 2023E 2024E 2025E 2026E 2027E
Sales Overdrafts & short-term loans 500 700 - 597 478 382 306 245
Accounts payable 5,932 6,265 6,310 7,776 8,491 9,077 9,703 10,373
Other current liabilities 1,374 1,525 1,621 1,662 1,814 1,940 2,073 2,217
FVMR Total current liabilities 7,806 8,489 7,931 10,034 10,783 11,399 12,082 12,834
Long-term debt 15,809 14,693 14,353 10,885 8,708 6,967 5,573 4,459
Other long-term liabilities 4,600 5,553 5,533 5,622 5,712 5,803 5,896 5,990
P5F Total liabilities 28,215 28,735 27,817 26,541 25,203 24,168 23,552 23,283
Minority interest - - - - - - - -

Team Paid-up capital - Common shares

Paid-up capital - Preferred shares
1,044
-
1,071
-
1,085
-
1,085
-
1,085
-
1,085
-
1,085
-
1,085
-
Retained earnings 7,573 12,689 17,181 21,827 27,062 32,785 39,000 45,839
WCB Revaluation/Forex/Others 2,448 2,089 2,511 2,511 2,511 2,511 2,511 2,511
Total equity 11,065 15,849 20,777 25,424 30,658 36,381 42,596 49,435
Total liab & shareholders' equity 39,280 44,585 48,595 51,965 55,861 60,549 66,148 72,718
ESG Book value per share adjustments
Total Equity 11,065 15,849 20,777 25,424 30,658 36,381 42,596 49,435

Value Less: Preferred shareholders' equity

Less: Hybrid debt & others
-
-
-
(0)
-
(0)
-
-
-
-
-
-
-
-
-
-
Common shareholders' equity 11,065 15,849 20,777 25,424 30,658 36,381 42,596 49,435

Risks BVPS (US$) 25.0 35.7 46.7 57.0 68.5 81.1 94.8 109.8

Sources: A. Stotz Investment Research, company data, Refinitiv

12 May 2021 16
NETFLIX: Balance sheet - Cash flow statement

Story Actual Forecast

(YE Dec, US$ m) 2020A 2021A 2022A 2023E 2024E 2025E 2026E 2027E
Sales Net income 2,761 5,116 4,492 4,887 5,506 6,019 6,537 7,193
Depreciation & amortization 10,923 12,439 14,363 4,535 9,820 8,407 11,599 14,201
FVMR Calculated chg in net working capital
Other non-cash & balancing items
791
(12,048)
(3)
(17,160)
(1,024)
(15,804)
1,689
-
1,308
-
533
-
569
-
609
-
Operating cash flow 2,427 393 2,026 11,111 16,634 14,959 18,705 22,003
P5F Capital expenditures (498) (525) (408) (5,713) (11,130) (10,738) (13,473) (16,455)
(Inc)/dec in other investments (7) (815) (1,669) (62) (185) (35) (68) (70)
Team Investing cash flow
Increase/(dec) in debt
(505)
1,009
(1,340)
(500)
(2,076)
(700)
(5,776)
(2,871)
(11,315)
(2,296)
(10,773)
(1,837)
(13,541)
(1,470)
(16,525)
(1,176)
Dividend paid - - - (241) (271) (297) (322) (354)
WCB Change in equity 235 (426) 36 0 0 (0) 0 (0)
Others (8) (224) - 89 90 91 93 94
Financing cash flow 1,237 (1,150) (664) (3,023) (2,478) (2,042) (1,699) (1,436)
ESG Net inc/(dec) in cash & cash equi 3,159 (2,097) (714) 2,313 2,841 2,144 3,465 4,042
Beginning cash 5,018 8,206 6,028 6,058 8,371 11,213 13,356 16,821
Value Adjustment for historic data 28 (81) 745 - - 0 - -
Ending cash 8,206 6,028 6,058 8,371 11,213 13,356 16,821 20,863

Risks
Sources: A. Stotz Investment Research, company data, Refinitiv
12 May 2021 17
NETFLIX: Ratios

Story Actual Forecast Recent quarters

(YE Dec) 2020A 2021A 2022A 2023E 2024E 2025E Jun '22 Sep '22 Dec '22
Sales Internal liquidity (x)
Current ratio 1.3 1.0 1.2 1.1 1.3 1.4 1.0 1.1 1.2
Quick, or acid test ratio 1.3 1.0 1.2 1.1 1.3 1.4 1.0 1.1 1.2
FVMR Working cap. mgmt (Days)
Inventory conversion period - - - - - - - - -
Receivables collection period 8 9 10 10 9 9 9 9 11
P5F Days from raw mat to coll 8 9 10 10 9 9 9 9 11
Payables deferral period 148 127 118 122 129 131 116 115 105
Cash conversion cycle (141) (118) (108) (112) (120) (121) (107) (105) (94)
Team Profitability ratios (%)
Gross profit margin 43.3 41.6 39.4 40.1 40.1 40.1 41.1 39.6 31.2

WCB EBIT margin

EBIT return on avg assets
22.7
15.5
20.9
14.8
17.8
12.1
18.5
12.7
18.5
13.0
18.5
12.8
19.8
13.8
19.3
13.1
7.0
4.6
Return on average assets 7.5 12.2 9.6 9.7 10.2 10.3 12.6 11.9 0.5
ESG Financial risk (x)
Liabilities-to-assets (%) 71.8 64.5 57.2 51.1 45.1 39.9 58.8 56.8 57.2
Debt-to-equity 1.5 1.0 0.7 0.5 0.3 0.2 0.7 0.7 0.7
Value Net debt-to-equity 0.7 0.6 0.4 0.1 (0.1) (0.2) 0.4 0.4 0.4
Times-interest-earned 21.6 24.3 28.3 17.3 33.2 39.2 25.3 30.5 26.9
Effective interest rate (%) 4.8 4.8 4.7 4.9 4.9 4.9 5.4 4.9 4.8
Risks
Sources: A. Stotz Investment Research, company data, Refinitiv
12 May 2021 18
NETFLIX: Ratios (continued)

Story Actual Forecast Recent quarters

(YE Dec) 2020A 2021A 2022A 2023E 2024E 2025E Jun '22 Sep '22 Dec '22
Sales General growth (YoY, %)
Revenue 24.0 18.8 6.5 9.5 9.2 6.9 8.6 5.9 1.9
FVMR Assets 15.6 13.5 9.0 6.9 7.5 8.4 13.1 11.3 9.0
Gross profit 40.2 14.3 0.7 11.5 9.2 6.9 (1.3) (4.3) (0.9)

P5F Operating profit

Attributable profit
118.3
47.9
8.9
85.3
(9.1)
(12.2)
13.7
8.8
9.2
12.7
6.9
9.3
(14.6)
6.5
(12.7)
(3.5)
(13.0)
(90.9)
EPS 46.9 84.2 (12.4) 8.5 12.4 9.1 6.1 (4.0) (90.9)
Team Recurring EPS 135.0 9.2 (12.2) 22.7 12.4 9.1 (11.5) (12.0) (78.3)
Du Pont analysis (%)
Net profit margin 11.0 17.2 14.2 14.1 14.6 14.9 18.1 17.6 0.7
WCB Revenue per US$100 of assets 68.2 70.8 67.9 68.8 70.1 69.4 69.5 67.5 65.3
Assets/equity (x) 3.9 3.1 2.5 2.2 1.9 1.7 2.5 2.4 2.3
ESG Return on equity 29.6 38.0 24.5 21.2 19.6 18.0 31.5 28.2 1.1
Others (%)
Effective tax rate 16.0 16.1 20.3 16.2 16.2 16.2 11.2 13.8 86.5
Value Dividend payout ratio - - - 5.0 5.0 5.0 - - -

Risks
Sources: A. Stotz Investment Research, company data, Refinitiv
12 May 2021 19
NETFLIX: Free cash flow data

Story Actual Forecast Fade period*

(YE Dec, US$ m) 2020A 2021A 2022A 2023E 2024E 2025E 2026E 2027E 2028E 2029E
Sales EBIT 5,686.3 6,194.5 5,632.8 6,404.0 6,993.1 7,475.6 7,991.5 8,542.9 11,382.9 11,726.1
Est tax rate (%) 16.0 16.1 20.3 16.2 16.2 16.2 16.2 16.2 35.0 35.0

FVMR NOPAT
Add: Depre & amort
4,777.7
10,922.6
5,199.9
12,438.8
4,491.9
14,362.8
5,366.5
4,535.1
5,860.2
9,819.7
6,264.6
8,407.1
6,696.9
11,598.6
7,158.9
14,200.7
7,398.9
14,883.6
7,622.0
15,552.8
Less: CAPEX (497.9) (524.6) (407.7) (5,713.3) (11,129.9) (10,737.6) (13,473.2) (16,455.1)
Chg in A/R (156.4) (193.5) (184.6) 75.4 (84.0) (68.8) (73.6) (78.7)
P5F Chg in inventory - - - - - - - -
Chg in oth curr assets (239.5) (292.5) (981.4) 107.5 523.9 (109.5) (117.1) (125.2)
Chg in A/P 191.4 332.9 45.7 1,465.3 715.4 585.9 626.3 669.5
Team Chg in oth curr liabs 995.8 150.3 96.1 40.9 152.9 125.2 133.8 143.1
Less: Chg in working cap 791.2 (2.8) (1,024.2) 1,689.2 1,308.1 532.7 569.5 608.7
Less: Chg in invest cap (16,608.3) (17,355.1)
WCB Free cash flow to firm 15,993.6 17,111.3 17,422.8 5,877.6 5,858.1 4,466.8 5,391.7 5,513.3 5,674.1 5,819.6
FCF per share (US$) 35.2 37.6 38.6 13.0 12.9 9.8 11.8 12.1 12.5 12.9
NOPAT growth (%) 115.2 8.8 (13.6) 19.5 9.2 6.9 6.9 6.9 3.4 3.0
ESG FCF growth (%) (1.3) 7.0 1.8 (66.3) (0.3) (23.7) 20.7 2.3 2.9 2.6

Value
Risks
Sources: A. Stotz Investment Research, company data, Refinitiv.
12 May 2021 20
Note: *Shows the two first years of the fade period.
NETFLIX: Valuation and target price

Calculation of cost of equity (COE, %) Estimate I assume a risk-free rate of 3.5% and a market
Story Market: United States of America
Market risk-free rate 3.5
US$ Equity value per share (US$)
equity risk premium for the USA market of 8.0%,
like in the recent past.
Market equity risk premium 8.0 350 Current stock price (US$)
NETFLIX has been a High-beta stock; thus, I
Sales Market return
Company beta (x)
11.5
1.2
300 298 assume a beta of 1.2x. I forecast a capital
COE 13.1 250
structure with 15% debt to total capital, in line
Calculation of WACC Average with the current level. This results in a WACC and
FVMR Cost of debt 4.5 200 a discount rate of 11.6%. I use a terminal growth
rate of 2% and use Free Cash Flow to Firm (FCFF)
Average tax rate 28.7
150
After tax cost of debt 3.2 to value NFLX.
103
P5F
101
Cost of preferred stock - 100 My base case assumes 7.9% sales growth p.a.
Debt as a % of total capital 14.5 until 2027E, resulting in a value of US$103 per
Preferred stock as a % of total capital - 50
11 share based on the FCFF methodology. A 65.4%
Team Equity market value as a % of total capital
Weighted average cost of capital
85.5
11.6
-
DDM FCFF FCFE
downside compared to the current market price.

NFLX: Valuation (US$ m) DDM % FCFF % FCFE % My sensitivity analysis (see next page) shows that
my optimistic case assumes 8.7% sales growth
WCB PV of cash flow in years 2023-27
PV of fade period
1,029
2,127
21
43
19,284
20,988
41
45
10,742
17,718
24
39 p.a. until 2027E. If NFLX were to deliver 8.7%
PV of terminal value 1,763 36 14,626 31 11,033 24 annual sales growth, the value derived from FCFF
Present value of future cash flows 4,919 100 54,899 118 39,494 87 would be US$105.9 or 10% higher than my base
ESG Add: Cash & ST investments na* - 6,058 13 6,058 13 case. In my pessimistic case, I look at whether
Add: Long-term investments na - - - - - NETFLIX’s sales would grow by 7.1% per year.
Corporate value 4,919 100 60,957 131 45,552 100 Then the value would be US$100.2 per share or
Value Less: Total debt, preferred stock & minorities
Shareholder value
na
4,919
-
100
(14,353)
46,604
(31)
100
na
45,552
-
100
10% lower than my base case.

Number of shares (m) 452 452 452

Risks Equity value per share (US$) 11 103 101

Sources: A. Stotz Investment Research, company data, Refinitiv

12 May 2021 21
NETFLIX: Sensitivity analysis

Story Fundamentals (%, five year-average) Valuation (US$)

NFLX EPS growth Net margin ROE DDM FCFF FCFE PEG PB/ROE
Sales What if sales growth changed by X% from base case?
+10 (8.7%) nm 14.9 18.5 11.5 105.9 103.3 367.5 196.5
Base case of 7.9% nm 14.9 18.2 10.9 103.0 100.7 346.2 194.5

FVMR -10 (7.1%)

What if gross margin changed by X percentage points from base case?
nm 14.8 17.9 10.3 100.2 98.0 325.2 192.5

+2 (42.1%) nm 16.6 19.5 12.0 111.7 108.7 636.0 219.7

Base case of 40.1% nm 14.9 18.2 10.9 103.0 100.7 346.2 194.5
P5F -2 (38.1%) nm 13.2 16.8 9.8 94.3 92.6 109.2 169.7
What if discount rate changed, by changing the risk factor (beta) from base case?
+10 (Beta 1.32x, COE 14.1%) 9.7 97.9 95.8
Team Base case of 1.20x (COE 13.1%)
-10 (Beta 1.08x, COE 12.1%)
10.9
12.3
103.0
108.3
100.7
105.9
What if terminal growth rate changed by X percentage points from base case?

WCB +1
Base case of 2%
11.6
10.9
109.4
103.0
106.0
100.7
-1 10.2 97.9 96.4

ESG
Note: PEG and PB/ROE are based on 2023E relative to the Telecoms sector in USA.

Value
Risks
Sources: A. Stotz Investment Research, company data, Refinitiv
12 May 2021 22
NETFLIX: The main risk is Stiff competition in the streaming market

Netflix faces stiff competition in the streaming market, risking its market leader position.
Story One of the biggest risks to Netflix's performance is the increasing competition in the streaming market.
With the launch of several new streaming services, Netflix faces stiff competition from companies like
Sales Disney+, Amazon Prime, and Hulu, among others. If Netflix fails to keep up with the evolving competition
and maintains its position as a market leader, it could lead to a decline in its subscriber base and revenue.

Rising content acquisition costs may jeopardize Netflix's ability to produce quality
FVMR content.
Netflix's success is largely dependent on the quality of its content offerings. To continue attracting and
P5F retaining subscribers, the company needs to invest in creating and acquiring new content. The cost of
acquiring high-quality content has been rising, and Netflix has been investing heavily in original content. If
the company fails to produce content that resonates with viewers or if its content costs become
Team unsustainable, it could lead to a decline in subscriber growth and revenue.

Regulatory risks pose a threat to Netflix's compliance and could lead to legal actions.
WCB The streaming market is subject to various regulations that could impact Netflix's performance. For
example, changes in net neutrality laws or content regulation could affect the company's ability to offer
certain content or impact its pricing. If Netflix is unable to comply with these regulations, it could face fines
ESG or legal action, which could negatively impact its performance.
Technological risks threaten Netflix's ability to deliver seamless streaming services.

Value As a technology-driven company, Netflix is vulnerable to several technological risks. These include
cybersecurity threats, server downtime, and content delivery issues. If the company experiences any of
these issues, it could lead to a decline in user experience, which could result in a loss of subscribers.

Risks
12 May 2021 23
NETFLIX: Battling to survive increase competition in the market

I initiate coverage on NETFLIX with a SELL recommendation based on a target price of Netflix Inc.
US$103, implying a downside of 65.4%. I derive my target price from a DCF-based
valuation using a WACC of 11.6% and a terminal growth rate of 2%. Recommendation: SELL
Current price: US$298
Highlights: Target price: US$103
• NETFLIX has a strong future despite intense competition Up/(downside): (65.4%)
• NETFLIX’s new ads-supported plan could be the driver of positive revenue growth
• Gaming may be a growth avenue for Netflix
Risks: Increased competition, Rising content acquisition costs may jeopardize Netflix's Stock data
ability to produce quality content, and Technological risks threaten Netflix's ability to
RIC code NFLX.O
deliver seamless streaming services, Regulatory risks pose a threat to Netflix's
Index .INX
compliance and could lead to legal actions
Kowiyu A. Gbadegesin S&P 500 (9 March 2023) 3,918.32
[email protected] Market cap (US$ m) 134,745
Shares outstanding (million) 452
Valuation table
Please refer to the important Par (US$) 10.38
Year end Dec 21A 22A 23E 24E 25E
disclaimer and disclosures at PE (x) 29.7 33.8 27.6 24.5 22.5
the end of the report. Recurring net profit growth (%) 9.5 (13.0) 23.0 12.7 9.3
Recurring EPS (US$) 10.0 8.8 10.8 12.1 13.2
Recurring EPS growth (%) 9.2 (12.2) 22.7 12.4 9.1
PBV (x) 8.3 6.4 5.2 4.3 3.7
BVPS (US$) 35.7 46.7 57.0 68.5 81.1
ROE (%) 38.0 24.5 21.2 19.6 18.0
DPS (US$) - - 0.5 0.6 0.7
Dividend yield (%) na na 0.2 0.2 0.2
Enterprise value (US$ m) 144,110.4 143,040.0 137,856.6 132,718.7 128,737.9
EV-to-EBITDA (x) 7.7 7.2 12.6 7.9 8.1

12 May 2021 24