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Analysts Ryan Christian Current Price: $192.02 [email protected] William Spooner [email protected] Target Price: $245-250 Company Overview Key Investment Highlights Netflix is a media streaming service based in the United • Favorable economic conditions- Based on current States. The company started in 1997 as a DVD-by-mail and projected macroeconomic indicators the service, but in recent years has pivoted to a leading media and economy is expected to see strong and steady growth content streaming service. For a monthly subscription fee, for the near future. While interest rates are expected Netflix offers over 125M hours of movies, TV shows, and to rise, this is to combat inflation from the growing documentaries to watch on demand using an internet- economy. connected device. Netflix launched their streaming service in • International growth opportunities- Netflix is 2007 and has cemented itself at the forefront of content positioned to be a leading streaming provider for streaming services in domestic and international markets. international markets like Mexico, Brazil, Argentina, Netflix surpassed 100M total subscribers in Q2 2017 and and Canada. As a result, Netflix is seeing substantial continues to expand internationally at rapid rates. This growth in these regions that is on pace to carry the meteoric rise has positioned Netflix as the industry leader in company to the rank of the world’s biggest media media streaming services across the globe. Netflix's main streaming service. While domestic competition is goals are to strengthen their offering of Netflix Original something to take into account, international content, grow their subscriber base internationally and competition is much lighter and will allow Netflix to domestically, and to fend off competition. expand into a truly global company. • Content creation- With increased competitors in the Stock Performance Highlights domestic marketplace Netflix will be required to 52-week High $204.38 spend large amounts of money to finance the 52-week Low $110.68 production of original content. While the original Beta 1.225 content is the cornerstone of Netflix’s operations, the cost is something to have concerns about. We expect Netflix to operate with negative free cash flow for Share Highlights 2017 and 2018 as they spend upwards of $8 billion Market Capitalization 82.3B on original content. This content will contribute Shares Outstanding 428.822M additional growth to their subscriber base and fuel P/E (forward) 231.24 future earnings for the company. EPS (2017) $0.44 One-Year Stock Performance Company Performance Highlights ROA 2% ROE 7% Financial Ratios Current Ratio 1.25 Debt to Equity 330% 1 Source: Google Finance 1 markets has given U.S. companies an upbeat outlook for the Executive Summary 42 near future . As of November 10, 2017, our University of Iowa Krause The election of Donald Trump offers the potential for policy Fund analyst team recommends a “buy” rating for Netflix Inc. changes that would result in as stronger Real GDP for the U.S. Aside from running on the promise of 3% annual Real GDP stock. This report contains our analysis of the company and 6 the reasons that we have for our rating. In our opinion, Netflix growth , Trump has proposed several measures that would is well positioned to expand into international markets such as both directly and indirectly influence an increase in Real GDP. Mexico, Brazil, and Canada. International subscribers The agenda includes tax cuts for the general population, surpassed domestic subscribers in Q3 2017 and Netflix corporations, small businesses, overseas repatriation, and infrastructure spending. These measures, if enacted, would all expects to see strong growth from their overseas operations 4 over the course of the foreseeable future. Netflix is focused on contribute to increased GDP growth at or above 3% . investing heavily in original content to remain the industry leader in media streaming. With the addition of competitors in Jerome Powell, recently nominated to replace Janet Yellen as the industry, Netflix seeks to distinguish themselves with a chair of the Federal Reserve, is expected to pursue a slow to moderate increase in interest rates to fight inflation as the rich and plentiful content library. Netflix has a strong 43 domestic subscriber base and in order to prevent subscriber economy continues to heat up following the crash of 2008 . losses as competitors enter the market place they must Powell has experience working on Wall Street, as well as continue to offer award winning content at an affordable working with lawmakers to avoid a government shut down in monthly rate. Netflix is also focused on creating original 2011. The cool-tempered Powell is expected to be a safe content with wide appeal in emerging international markets. choice to head the Fed. This content diversification ensures that Netflix will be able to increase their international subscribers while maintaining a With these key factors in mind, we expect that Real GDP strong grasp on the domestic market. Based on our expectation growth will be sustained in the 2.8 – 3% range. As a result, the of continued economic growth, we expect Netflix to grow consumer discretionary sector stands to benefit from the their subscriber base and minimize the effects of increased increased spending from consumers as well as the potential competition. benefits of corporate tax cuts and overseas repatriation of profits. Macroeconomic Outlook Consumer Confidence Index (CCI) U.S. Real Gross Domestic Product The Consumer Confidence Index is a leading economic indicator that surveys 5,000 random households each month Real Gross Domestic Product (GDP) is the value of the goods asking questions regarding their outlook on the economy. and services produced by the nation’s economy less the value Questions gauge opinions on the current state of the economy of the goods and services used up in production2. Consumer and about future expectations regarding growth and job discretionary purchases make up approximately 69% of U.S. prospects. A healthy CCI is correlated with increases in 6 Real GDP2, therefore, growth of Real GDP coincides with consumer spending . With increased consumer spending, the growth of the consumer discretionary sector. consumer discretionary sectors and Netflix stand to benefit. Source: Bureau of Economic Analysis2 GDP has increased at a rate of 3.1% and 3% for the past two quarters, respectively. These rates mark the highest two consecutive quarters of growth since Q2 and Q3 of 2014. The growth of consumer discretionary purchases has proven to be Source: CNBC (Conference Board)8 a key component in the recent Real GDP growth. Additionally, the outlook for continued growth in international 2 The CCI in October was at a level of 125.9, nearing an all- are unable to acquire employment. This statistic is an extremely time high of 128.6 set in 20007. With the CCI nearing at reliable gauge of the strength of the economy. With a lower extremely high-levels the consumer discretionary stands to unemployment rate the economy is poised to see increased benefit. As consumers gain confidence in the stability of the growth of key metrics like Real GDP. Additionally, low economy as well as job prospects they will spend more on unemployment indicates that individuals pursuing an income discretionary purchases such as media streaming platforms through employment have a stable income and can spend more such as Netflix. money on discretionary purchases. Consumer Price Index (CPI) The Consumer Price Index (CPI) uses a basket of goods and services as a measure of annual inflation. The basket measures the weighted-average prices of food, housing, education, medical care and more to gauge inflation and its effect on the cost of living for the average American citizen. CPI rises with inflation and CPI decreases during recessionary periods. While a rise in the CPI means that consumers ultimately have less purchasing power per dollar, it can also be a good indicator for the momentum of the economy. A constant, but more importantly, controlled rise in the CPI is indicative of economic growth and a strong economy. Source: Bureau of Labor Statistics11 The U.S. added 261,000 jobs in October, causing the unemployment rate to drop to 4.1%11. This is due in part to workers re-joining the workforce after the September hurricanes. This drop continues a steady decline in the unemployment rate observed over the past year. An unemployment rate of 4.1% marks a 17-year low for the U.S.12. Over the long-run we expect unemployment to rise to a level in the range of 4.4 – 4.6%. Our opinion is that increased consumer confidence and a low unemployment will result in Source: Bureau of Labor Statistics9 more individuals actively pursuing employment. As more workers enter the workforce there will be a slight increase in The CPI rose 0.5% in September, continuing a three-month the unemployment rate. Ultimately, an unemployment rate of upward trend. Over the last twelve months, the index has risen 4.4 – 4.6% is still an indication of a strong and healthy 2.2%. This increase during the past 12 months can in large economy. The consumer discretionary sector will benefit as a part be attributed to rises in food and gasoline prices because result of the strong level of employment within the U.S. of recent hurricanes. Without the increases of the food and energy components the CPI increase comes out to roughly Interest Rates 0.1%. The Federal Funds Rate is the rate charged by banks for While the CPI is temporarily overstated as a result of the overnight loans to other banks. This rate influences all other recent hurricanes, the fed is still worried about further interest rates, including savings accounts, mortgages, treasury increases in inflation due to low unemployment and a notes, and bonds.

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