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

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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

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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. Higher interest rates will increase the cost of strengthening global economy10. The Fed is expected to raise borrowing and slow economic growth, but incentivize saving. the Fed Funds Rate in order to keep inflation around their Lower interest rates lead to decreases in the cost of borrowing target rate of 2%. An inflation rate around 2% ensures that and promote economic growth. Interest rates play a key role in prices of essential and non-essential goods should not change consumer discretionary purchases as consumers are forced to dramatically from year to year. Our team is confident that the either borrow or save as a result of the interest rates. Federal Reserve will be able to successfully maintain a constant growth in CPI while allowing the economy to Market expectations are that the Fed will raise interest rates continue a healthy upward trajectory. before the end of the year. The favorable economic conditions and solid GDP growth are signals to the Fed that interest rates Unemployment Rate should increase to prevent runaway inflation13. While raising The unemployment rate is a measure of the proportion of interest rates will hurt some discretionary spending, we eligible workers who are actively seeking work and those who believe the rate hike is necessary to preserve the current state

3 of constant economic growth by reducing inflation. With Jerome Powell as the president’s nomination to serve as chair of the Federal Reserve, we expect that the Fed will raise interest rates at a steady pace to avoid inflation based on key economic indicators.

Capital Markets Outlook

Given current economic conditions and forecasts, we expect to Source: Statista15 see continued growth in the capital markets. Most encouraging for global equities is the fact that global economic growth is With the advent of reliable high-speed internet and expanded currently seeing a level of synchronization not seen since Wi-Fi and cell data coverage, people are increasingly able to before the Great Recession. The U.S. is growing strong, the use the power of the internet to watch their favorite Eurozone has jumped the hurdles of its 2010-2012 debt crisis, entertainment programs outside of the constraints of their and China has calmed the fears induced by its summer 2016 living room. Now more than ever, people can watch their currency devaluation. Pair a global economy forecast to grow entertainment on any internet-capable device, at any time, at 3.6% with impending tax cuts and a low inflationary from the comfort of their own homes or on the go. As environment, and we do not expect to see a significant market consumers begin to expect more from their entertainment correction in the foreseeable future. The consumer providers, they have resorted to demanding bespoke cable discretionary sector stands ready to benefit from optimism in bundles, or "cutting the cord" to their cable companies the capital markets as it will lead to increases in consumer altogether. Millennials spend more time streaming content confidence and spending, resulting in stronger market than they do watching TV, and more than 20 percent of them performance for publicly traded companies in the sector. are viewing shows on their mobile devices16. As a result, streaming services are growing rapidly, with around 60% of 17 Industry Analysis consumers using them monthly . Media streaming has emerged as the most effective way to consume entertainment.

Industry Overview

Netflix is classified under GICS® as a member of the "Internet and Direct Marketing Retail" industry14. Companies that operate in this industry include: mail order and door-to- door retailers, TV home shopping retailers, and companies providing retail services primarily on the Internet not classified elsewhere14. Netflix technically falls under the "other" component of that description. Netflix operates in a relatively new space that is currently changing the way that people consume entertainment.

Over the past decade, the way that average people access entertainment has shifted dramatically. In the past, most video content was consumed over traditional cable television.

Companies like Disney, 21st Century Fox, or Time Warner Source: Statista17 would schedule shows to be broadcast at a set time and date. Consumers could either sit down during a scheduled time slot The chart shows U.S. historical and forecasted streaming to watch their show, or record to watch later. With video subscription revenue from 2011-2020. We believe this advancements in technology and the innovations of companies trend of increasing revenues will continue. This growth will such as Netflix, consumers may now watch their desired largely be driven by growing numbers of consumers having content on demand and can watch their show anywhere with better access to a more proliferated and faster internet over the an internet connection. coming years.

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Major Industry Players by its parent companies. While they are considered a major player at around 14% market share, they don't have the same Since its inception in 2007, the video streaming industry advantages that Netflix and Amazon Prime do. They are not largely been dominated by Netflix. Services like Amazon offered in nearly as many territories, and do not have the same Prime, Hulu, Roku, PlayStation Vue, HBO Go, and YouTube advantages in consumer data collection. Red quickly rose up to challenge Netflix. However, the major players are still Netflix, Amazon Prime, and Hulu. At first, companies in the industry didn't do much else but aggregate licensed content that already existed. Shows like AMC's The Walking Dead or NBC's The Office were the most U.S. Video Streaming Market Share - Major popular and highest-rated shows that streaming services had Players on their platform. This model changed in 2013 when Netflix offered its first original series, House of Cards. This changed the landscape of the streaming industry as streaming services were now focused on providing content exclusive to their platform. The addition of original content to services' lineups gave rise to things like "binge watching". With an entire season of new and exciting content being uploaded instantly, consumers now have even more freedom to watch on demand. Additionally, the original content created by Netflix is synonymous with award winning content. Netflix ranked 2nd in total Emmy wins behind HBO.

Source: Statista18 Netflix Originals Ratings (1-5 Stars) vs. Other Netflix holds approximately 50% of the U.S. Video Streaming Content market share. It is currently the only publicly-traded company in the U.S. that exclusively focuses on video streaming. Because Netflix was the first-mover in this space, they have been able to capitalize on having the most extensive library of content. In 2017, Netflix offered 1157 TV shows and 4593 movies on its platform19. Additionally, being the first-mover allowed Netflix to compile an enormous library of consumer data throughout the years, which gives it an advantage in determining consumer preferences. This data offers Netflix the ability to spend money on programming that is in-line with consumer demands. With Netflix spending billions of dollars each year to acquire new content for their platform, we believe they will successfully maintain the majority of the U.S. market Source: Business Insider20 even as more competitors enter the industry.

Amazon Prime did not begin as a video streaming service, however, in 2011, Amazon saw an opportunity to challenge Netflix in the streaming industry. Today, Amazon holds around 30% of the market share in the U.S. They gained this subscriber base by tacking-on their streaming service to their existing Amazon Prime subscription model. However, that does not mean their video service is second-rate. The Amazon

Prime Video business model follows Netflix's: they acquire Source: TechCrunch22 other content and produce original content. Amazon has similar advantages to Netflix in terms of consumer data, and is As a result of the quality of the Netflix Originals, the original able to leverage their tremendous spending power to add to content is among the most highly-demanded content across their content library. various streaming platforms. The chart below shows demand expressions in millions for original content in 2016. It is As a joint venture between Disney, 21st Century Fox, evident that there is a trend in consumer preference towards Comcast, and Time Warner, Hulu is somewhat different to its more original content. As a result, our team believes that competitors in the industry. Their platform is positioned more Netflix is poised for success over their competitors because of as a vehicle to deliver existing television series already owned the large quantity of their original content.

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Source: Factsset24

Source: BGR21 Market capitalization is defined as: a company's stock price multiplied by current shares outstanding. It is a helpful As consumer demand for original content increases so does measure to understand the size and valuation of a company, as the amount of money spent on original content for the well as to gauge things like growth or risk potential. In our streaming giants. analysis, Netflix falls in the middle of its comparable firms. It should be noted that the market cap of Netflix has nearly doubled over the last 12 months. This is the result of increased expectations regarding future subscriber growth for the company among catalysts.

The Price-to-Earnings Ratio (P/E) measures current share price against per-share earnings of the company. Currently, Netflix's P/E ratio is quite high relative to the rest of the comparable firms. This is a result of high growth expectations in the future. As a result, investors are willing to pay a premium on the company with the understanding that Netflix is poised to see strong earnings growth soon.

Earnings per share (EPS) is calculated by dividing net income minus dividends on preferred stock by average outstanding shares. It is a measure of profitability. Currently, Netflix is 23 Source: Recode lagging behind comparable companies in terms of EPS. This is expected because of the high cost of original and leased The aggregation of original content is the main focus for the content. We believe that as Netflix grows their content library streaming giants in the near and long term future. For 2017, and increases their subscriber base the firm will see increases Netflix is set to spend the most, $6bn, followed by Amazon in EPS as they become more profitable. Prime Video at $4.5bn, and Hulu at $2.5bn, on content for their platforms. Clearly, the competition between these firms is heating up and resulting in an arms race for content.

Industry Key Metrics

The table below shows some key price information from Netflix and comparable firms in the internet services or entertainment industries. Since Netflix is currently the only publicly traded pure-play video streaming service in the U.S., it is necessary to find comparable companies who engage in similar streaming or content creation activities.

Source: Factset24

The table above outlines margin calculations for Netflix and

6 comparable firms. It should be noted that Netflix's EBITDA which is much cheaper than most traditional cable packages. margin is exceptionally high. This is because Netflix has a Consumers are then left with the choice of which streaming large amount of content licensing contracts on its balance service to subscribe to. It is also common for people to sheet. These assets depreciate every year over the life of the subscribe to multiple streaming services based on what contract. This contributes a large amount to Netflix's content they enjoy. It is worth noting that Netflix recently amortization costs, which in turn raises EBITDA substantially. raised its prices across domestic subscription options and the When Amortization costs are removed, such as in EBIT consensus opinion is it demonstrated their pricing power over calculations, we see that Netflix is more in line with its peer in their current subscriber base. the internet space, Amazon. This is not to mention that Netflix has a reasonable gross margin, which is comparable to Threat of Substitutes: Moderate entertainment firms in the analysis. We predict that, as Netflix weans itself off these licensing agreements and replaces them Each streaming platform offers a specific and unique lineup of with original contracts, EBITDA will move to a more accurate content that cannot be duplicated. Therefore, consumers are level. free to choose which streaming platform they subscribe to and the choice is based primarily on the content provided by the Porter’s Five Forces service. Additionally, based on the relatively low monthly fee for these services it is quite common for people to subscribe to Competitive Rivalry: High several the services based on their content desires. This means that consumers do not feel the need to drop a streaming Netflix faces high competitive rivalry in the streaming service to add another, minimizing the threat of substitutes. business. The main area of competition is in content aggregation as consumers want high-quality content. Netflix Threat of New Entrants: Low has the largest market share, followed by Amazon, and then Hulu. Netflix has been the industry leader so far in producing The barriers to entry to enter the streaming business are quite original content, but Amazon, Hulu, and others are projected high. Purchasing or producing content is quite expensive, so to spend increasing amounts in 2017. We predict that this only companies that already have sizable content libraries or battle over content aggregation and creation will lead to large amounts of capital will be able to get into the business. increased content costs for the foreseeable future. While this Additionally, the investment required to create a streaming increased expense will affect the bottom line for Netflix they platform and either rent or own the necessary servers is very have built a strong subscriber base that will afford them the capital intensive. This limits the number of entrants into the opportunity to spend the required amounts on the best content streaming industry to companies with a distribution platform for their platform. Once Netflix has accumulated enough or large library of original content. content they will be able to slow their spending in this area and focus on increasing their margins and revenues. Catalysts for Growth & Change

Bargaining Power of Suppliers: Moderate Higher Internet Speeds Netflix faces a key dilemma when it comes time to decide whether to make or buy content. Content licensing can cost a Higher internet speeds and advances in mobile technology are hefty price- Netflix spent $13.5M on each episode of The boons for the industry. Wi-Fi speeds are continuously getting Walking Dead in 201425. Licensing content can prove to be faster and the capabilities of 4G and LTE offer a lot of troublesome. Netflix has benefited from a licensing agreement potential for the streaming companies. As consumers can more with Disney, however, Disney recently announced they will easily utilize internet services outside of the home, the demand not renew the agreement with Netflix and will instead pursue for streaming will continue to increase. Consumers will have their own streaming platform in 2019. Among all more time to engage with their favorite shows and movies entertainment companies, Netflix has been the second largest which furthers the need for Netflix to continue to develop new producer of original content, behind only Disney26. The good and exciting content. By occupying more of the consumer’s news is that streaming companies can also produce their own time on a daily basis Netflix will cement its role in their content at a lower cost. However, that includes its own risks - routine. original content is unproven and must succeed on its own.

Bargaining Power of Buyers: Moderate

Consumers can choose from a variety of streaming services. With competition to create content being as high as it is, customers have the final say in deciding what types of content to purchase and consume. Prices are another factor, subscriptions to services can range from about $8 to $25,

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Mobile share of digital video plays 2013-2017 international growth will continue to drive overall revenue growth for this industry and that Netflix is best positioned to benefit. Proliferating the global markets should be at the top of the to-do list for streaming services.

Net Neutrality Laws

"Net Neutrality", in the context of the streaming industry, essentially refers to the concept that Internet Service Providers (ISP's), like Comcast, AT&T, or Verizon can't handicap internet speeds for competing services. Because most ISP's have their own streaming services while also controlling the speed at which anyone can access the internet, they might be tempted to slow down traffic for competitors like Netflix or Hulu. Net Neutrality has been a given for the streaming industry up until this point. Now, the new head of the FCC is starting the process to overturn previous regulations and make Net Neutrality unenforceable. This is troubling news for Source: Statista27 streaming services, as the loss of Net Neutrality protections could mean more problems and higher costs when dealing with ISP's. If ISP’s decide to charge more or throttle the The above chart shows the percentage of total video plays that speeds at which users can stream content, that could kill were viewed on mobile devices using a data internet business. However, it will be interesting to see how the connection. Since consumers are already using their devices to situation affects international markets, as they don’t fall under stream content on-the-go, streaming services will continue to the same regulation that U.S. markets do. capitalize on that opportunity by offering mobile apps and continually streamlining the mobile experience. Original Content

International Growth Creating and aggregating extensive libraries of original content will be the focus of streaming services going forward. International growth is now a major focus in this industry. As Since most major streaming services offer very similar technology upgrades trickle into foreign countries and their platforms and features, content will be the catalyst for internet infrastructure improves, they become a desirable consumers to choose one platform over another. Although target for the streaming business. Now, as domestic revenue content creation requires large up-front capital expenditures, growth slows, streaming companies need to focus on creating content in-house will save money in the long run by providing international language support and creating content avoiding the costs of negotiating contracts with outside that appeals to the foreign markets. content producers. Hulu fills its content library with shows and movies that are already owned by their contributing parent companies. Companies like Netflix and Amazon will have to produce their own content if they want a stronger advantage for the long-term future.

Company Analysis

General Information

Netflix is an entertainment company that has become the front-runner of its industry by providing internet television. Founded in California in 1997, Netflix began as a DVD-by-

Source: Business Insider28 mail rental service. In 2007, the company capitalized on the opportunity to reach consumers instantly, and launched the As the previous graph shows, when Netflix does something as video streaming service that it has become today. Now, small as adding local language support to a country like Netflix has over 109 million global subscribers enjoying 125 Poland or Turkey, interest immediately jumps. With an initial million hours of available content. Since the launch of their hit investment in each foreign market Netflix can begin to see an show House of Cards in 2013, Netflix has been expanding into increase in overall use for that region. We predict that the television and film production business. Currently, the

8 service provides more than 1000 hours of original Netflix Subscriber Count (millions) programming to its subscribers, and plans to spend billions of dollars each year to provide even more Netflix Originals29.

Business Segments

Netflix has three business segments. These are: domestic streaming, international streaming, and DVD-by-mail rental services.

Source: Fox Business30

Netflix will require strong international growth to meet expectations of analysts covering the stock. While the increased competition domestically will hinder Netflix’s ability to add U.S. subscribers at a growing rate they have an advantage overseas. By engaging users all over the world

Source: Netflix 10-Q29 Netflix is poised to become a huge media conglomerate that serves many different regions and across a variety of The DVD rental service subscribers have been declining at a languages. Something that really stands out for Netflix is their rapid pace since streaming began in 2007. We expect the DVD willingness to spend on content filmed in foreign studios, with rental service to diminish and ultimately become non-existent foreign actors, and in foreign languages. This content sparks by Q4 2020. The DVD segment composes a small percentage international growth while also having substantial appeal in of total revenue and is losing subscribers at a very fast rate. the U.S. This is not a significant concern for the company as there is an abundance of expected growth for their other business Number of U.S. Netflix DVD subscribers 2011-2017 segments. (millions)

Netflix is the largest domestic streaming service available in the U.S. Accordingly, Netflix's domestic streaming services accounted for 54% of Netflix's revenue from Q1-Q3 of 2017. As more competitors enter the domestic streaming segment we anticipate diminished subscriber growth for Netflix. We do not believe that Netflix will lose subscribers as a result but do expect they will start to see slower growth in that segment.

Internationally, Netflix is also one of the most established and well-known streaming services available to global consumers. Operating in over 190 countries29, Netflix is constantly looking to add subscribers outside the U.S. With domestic subscriber growth slowing, the international business is Source: Statista32 Netflix's next frontier. From Q1 through Q3 2017, Netflix's international streaming services accounted for 42% of revenue. Additionally, in Q3 2017 international subscribers Platform Analysis surpassed domestic subscribers. This trend is expected to continue as Netflix is growing international subscribers at Netflix's current platform operates much like many other web some very high rates. Ultimately, Netflix will require this applications. Users log in to their computer, mobile device, growth to continue to exceed analyst expectations in order to gaming system, smart TV or other internet connected device grow into their valuation. through a login portal. Upon login, users are greeted by a splash screen with content organized based on their personal viewing behavior. Users can search for content by title, genre,

9 format, actor, or director. Additionally, based on the large exchange rates constantly varying. However, management amount of data Netflix has collected on viewing behavior they does generally try to start prices higher than lower, as its often can recommend shows with a great deal of success. This easier to freeze or lower prices than to raise them. results in consumers finding more shows they are interested in Additionally, offering the product at a bit higher price signals and spending more time on the platform. to the foreign consumer that Netflix is a premium product that can outmatch any local pay-tv product35. Regardless, the costs for a standard subscription can vary from $5 in Mexico, to $12 in Switzerland35.

Netflix's DVD segment is also its smallest and has shown negative growth since streaming began. Prices here start at $5 for "Starter", which offers 2 rentals per month, $8 for "Standard" and $12 for "Premier", which both offer unlimited rentals per month. These plans can be combined with streaming plans.

Recent Developments

Source: Forbes32 Recently, Netflix has increased prices for their domestic Netflix will also create specifically targeted "genres" for the streaming segment, issued debt to finance the production of user to watch based on this history, such as "Heist films" or additional original content, and demonstrated their ability to "Coming of Age". The appeal of Netflix's recommendation integrate international subscribers into their service. These algorithm is that users are given a whole host of content to items play a big role in the reason Netflix is poised to continue watch up front, without having to dig too deep to find it. This growing and remain a premier streaming service. way, Netflix can capitalize on having a vast array of content, yet make their platform experience much more user-friendly. This October, Netflix announced price increases. This is behavior consistent with past company actions. Originally, Netflix also utilizes this data to make decisions on what streaming was a free add on to DVD customers. In 2011, content to license, continue to license, or create. This allows streaming and DVD's were split, both costing $8. In 2014, Netflix to have a high success rate when it comes to creating streaming subscriptions were raised to $9. This October, the shows with wide appeals while minimizing the shows they standard streaming plan was raised to $10 per month. These create that end up failing to connect with a large audience. price increases demonstrate management’s belief that they have pricing power over their consumers. While competition Cost Breakdown can increase over the next handful of years this behavior demonstrates that management is not worried about people

dropping their subscription. Once Netflix has a subscriber, Currently, Netflix offers several different subscription plans. they tend to not lose subscribers. We predict this move will be The U.S. options are broken down in the following diagram: nothing but positive for Netflix. The service is already

established in the minds of its subscribers and gradual price increases have not caused a significant number of subscribers to cancel their memberships.

This October, Netflix announced that it would be issuing $1.6B to fund an expanded original content budget for 201836. These notes will have a term through 2027 and add to Netflix's Source: Netflix34 current long term debt of $3.36B. Netflix's objective is to continue high amounts of spending to develop an ever- U.S. subscribers are offered three pricing options ranging from growing library of original content in order to appeal to a $8-$14. The more expensive plans offer higher resolutions and greater array of customers. By increasing their appeal to more more screens at once. Pricing was increased in October, the subscribers and fueling further subscriber growth, Netflix will price for the Standard plan was raised by $1 and Premium was be able to grow their subscriber base which has long term raised by $2. We predict that these prices will not be raised benefits. Once growth has slowed Netflix will be able to slow anytime soon. We expect that prices will be increase gradually their spending on content and rely on their extensive content and in small increments. library. This approach has risks but is necessary if Netflix wants to keep expanding. This decision to spend large Internationally, subscribers are offered the same packages at amounts on content will affect free cash flow for the company similar costs. Generally, management has tried to match costs in recent years but with current domestic and international to the dollar, but that is not always possible with foreign growth trends they should be cash flow positive by 2019.

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Following Amazon and Hulu are several other services. HBO As seen in the chart below, Netflix's earnings per share have Now is a service available to all current subscribers of HBO, consistently beaten consensus estimates in recent quarters. and it streams all current and past HBO content.

Roku and YouTube Red are yet two more services that have Netflix Historical EPS vs. Estimates gained attention recently. Roku is positioned as a simple way to convert your TV into a streaming-capable device. However, it is focused on hardware and smart TV’s and less on content creation. YouTube Red is a way for YouTube to capitalize on its enormous library of content. The main benefit of the service is the removal of advertisements.

S.W.O.T. Analysis

Strengths

Industry Leader

Netflix was the first company in the streaming space and is the

Source: Estimize37 largest media provider in the industry. Netflix is the largest company in video streaming, able to provide targeted content In the past two years, Netflix has consistently beaten analyst to over 190 countries. It is also currently the only pure-play EPS estimates. This performance displays the ability of video streaming company that is publicly traded in the U.S. Netflix to appeal to large numbers of consumers domestically and abroad. We anticipate that Netflix will continue to Brand Recognition increase subscriber numbers at high rates, resulting in higher total revenue. Since launching its streaming business, Netflix has become a pop-culture phenomenon. Their content lineup includes hits Competing Services like House of Cards, Narcos, Stranger Things, Orange is the New Black, Black Mirror, and more. To propel that lineup towards success, Netflix has built a strong following through Amazon Prime Instant Video is Netflix's largest competitor, social media and traditional advertising. The following of with approximately 30% total market share. It originated as an those shows has largely spread through word-of-mouth and add-on feature to Amazon's flagship subscription service, social media. Social media especially has been a boon to the Amazon Prime. Amazon was able to gain video streaming brand, leading to the invention of phrases like "Netflix and market share extremely quickly by offering the feature to Chill" or other jokes about the service. Netflix has become Prime subscribers at no extra cost. Amazon Prime Instant ingrained in the public consciousness as the way to spend lazy Video currently costs less than Netflix, at $100 a year. For that Sundays, date nights, and relaxation time after a long work cost, Amazon Prime users get the right to stream thousands of day. hours of content.

Recommendation Algorithm/User Data In fact, Amazon has four times as many films available to stream than Netflix - 18,405 films vs. Netflix's 4,563, although 38 Since the launch of its streaming service, Netflix has been able Netflix has more TV shows . Like Netflix, Amazon is to collect vast amounts of data on its users' viewing beginning to produce original content as well. With a large preferences. This fact pushed the company to create a market share almost the size of Netflix's and a large content recommendation algorithm to make their extensive library of library to back it up, Amazon currently stands as Netflix's content more accessible and user-friendly to subscribers. Due greatest competitor in the video streaming space. to this algorithm, Netflix's user experience is noticeably smoother than its competitors. Having its hands on endless Hulu is Netflix's second-largest competitor, at around 15% amounts of easily- quantifiable usage data puts Netflix's market share. Hulu costs $8per month, however it should be fingers on the pulse of consumer preference. From all that noted that this subscription has commercials. To go data, Netflix knows exactly what shows are being watched, by commercial-free, consumers must commit to a $12 monthly who, where, when, and for how long. This information is fee. The other catch with Hulu is that users are only allowed to invaluable when deciding what type of content to add to its watch content on one screen at a time. Hulu is more TV- library. centric, drawing mostly on content that is already owned by its parent companies.

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Weaknesses technology, that just creates more screens for Netflix to stream to. Especially since mobile broadband and data connections Suppliers becoming Competition are becoming faster and more reliable, Netflix will have a huge opportunity to expand as technology offers more ways In the beginning, the content behind Netflix's streaming for subscribers to consume content. service was all licensed. Netflix would sign contracts with content creators. to have rights to offer their content to Netflix Mobile Phone Users as Percentage of Global subscribers. Now, those companies have decided to compete Population - 2019-2019 with Netflix. The biggest name to do this would be Disney, who declined to renew their contracts with Netflix earlier this year. Netflix is trying to remedy this growing problem by expanding their library of original titles. However, this increased competition may become more of a problem if Netflix is unable to retain market share against their new competitors.

Revenue Depends on Subscriptions

Netflix faces a potential problem with subscription fatigue. The promise of streaming services was the ability to reduce spending on content consumers do not want to purchase. However, as more and more streaming services emerge, consumers may be reluctant to subscribe to all the additional services. Revenue growth depends on subscription growth, Source: Statista40 and domestic growth has slowed recently. Netflix will look to the international markets to continue growing its base. This Threats has led to a major problem with customers illegally sharing accounts with family and friends. Netflix already offers the Decreasing Subscription Growth option to have more screens with its premium package, but could stand to increase revenues if they found a way to cut Netflix currently relies exclusively on subscriptions as its sole down on account sharing. source of revenue. If it does not find another source of revenue, i.e. advertising, it could theoretically reach a sort of Capital Expenditures "carrying capacity" for subscriptions, and be starved of the growth it needs to pay for its ever-increasing expenses. Netflix's new strategy is essentially a race to expand their content library. Netflix has announced that they plan to spend Foreign Exchange Rates $8B in 2018 on original content, with the goal of having a library with 50% original programming39. These enormous up- With an international business growing at ever-increasing front costs have taken a toll on the company's free cash flow, rates, Netflix will be exposed to increasing amounts of but we do expect this investment to result in healthier margins currency risk. after the initial cost. Price Hikes Opportunities If subscriber growth does not prove to be great enough to pay International Growth for increasing capital expenditures, Netflix may be forced to implement more price hikes on their subscription costs. This Netflix has a huge opportunity to become a ubiquitous video- move would have the potential to alienate customers, and streaming platform for the entire world. They have already could possibly price out some subscribers from being able to taken steps toward this goal. By tapping into foreign markets, afford Netflix's services. Losing large amounts of subscribers tailoring content towards foreign tastes, and providing foreign- would be a disaster for Netflix. language support, they are close to becoming the world standard streaming service. Valuation Analysis

Technological Advances Revenue Growth

Technology is crucial to the evolution of Netflix. As the chart We project revenues to grow hand in hand with increases in below shows, 64% of the world's population currently uses a subscriber growth. Additionally, with increases in subscription mobile device. As more and more of the world uses prices Netflix will see growth in their revenues. These two

12 levers are the core factors behind Netflix revenues and will be forward. the driving force behind revenue growth. We project fairly strong domestic growth coupled with strong international Weighted Average Cost of Capital (WACC) growth. We calculated a WACC of 8.27% using our capital structure Cost of In-house Production of 95% equity and 5% debt. We expect Netflix to maintain this capital structure indefinitely. The WACC is derived using Cost of in-house productions account for a large part of the information regarding cost of debt and cost of equity Netflix’s expenses. Given the current competitive environment below. and current company guidance we expect that Netflix will continue to spend billions of dollars each year on the Cost of Debt production of original content. After 2020 we expect content spending to begin to curtail yet still remain a significant To calculate our cost of debt, we added the default risk expense for the company. premium of a corporate bond associated with a BB- rating. This resulted in a 5.79% cost of debt. We then calculated the Content Library after-tax cost of debt by multiplying the pre-tax cost of debt by one minus Netflix's marginal tax rate of 35%. The after-tax cost of debt we calculated for Netflix is 3.76%. Netflix’s content library is the most recognizable aspect of the streaming service. It serves as the differentiator between all available streaming platforms and contributes to the decision Cost of Equity consumers make regarding which services to subscribe to. We anticipate that Netflix will look to continue to grow their We used the Capital Asset Pricing Model (CAPM) to calculate content library a significant amount over the next 3 years and Netflix's cost of equity. The three variables we used to then continue to grow the library indefinitely. This growth is calculate the CAPM are as follows: essential to Netflix’s ability to continue to grow its subscriber base as well as retain their current subscribers. • Beta (raw) = 1.225 • Market risk premium (MRP) = 4.52% Other Operating Expenses • Risk-free rate = 2.9% Netflix has an opportunity to grow into international markets Beta was collected from Bloomberg. The market risk premium and as a result will require increased spending on other was derived from Damodaran’s trailing 12-month adjusted expenses like marketing and administration. These increases market risk premium. The risk-free rate used reflects the are necessary to reach a larger audience and ensure the platform is adjusted to the different markets. current yield on the 30-year U.S. Treasury.

Amortization Expense Valuation Models

Netflix amortizes their content library over a long period of After our analysis, we calculated an intrinsic value for Netflix, time. This amortization is done with the viewing habits of Inc. of $231.34. We calculated this price using various their subscribers in mind. The content is amortized more in its different valuation models discussed below, but believe the early years on the platform and then this amount declines over DCF and EP models are the best representation of the value of the duration of the program’s time on the platform. Netflix Netflix due to company having no true peer competitors and only amortizes their Netflix Originals because of the structure not issuing dividends. of these content assets. Discounted Cash Flow & Economic Profit Model Capital Structure Using the discounted cash flow and economic profit model, As a result of the high cost of original content it is necessary we calculated a stock price for Netflix Inc. of $231.34 and an for Netflix to spend large amounts of money to acquire new adjusted price of $248.13 which we believe is an accurate content to keep subscribers utilizing the platform on a frequent representation of the company's intrinsic value. Important basis. This large cost will lead to Netflix operating at a assumptions made in this model included the terminal value negative free cash flow for a number of years. As a result, growth rate of 3.56%, which was derived from the terminal Netflix will be required to continue issuing debt over a growth rate of NOPLAT in year 2024. Free cash flows carry a number of years. This is relevant to the valuation given their negative balance into 2017, but then recover thereafter. “junk bond” rating. Therefore, it is necessary to account for Negative free cash flow represents guidance predicting Netflix increasing debt levels within Netflix. Ultimately, we expect will spend $6 billion in capital expenditures in the coming Netflix will continue with their current capital structure going year.

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Dividend Discount Model values, as they affect the overall costs of borrowing for the firm and the inputs to free cash flows for the firm, respectively We do not believe the dividend discount model is an accurate representation of the current value of Netflix as the company does not currently pay dividends and management has indicated they will not payout a dividend in the foreseeable future. We calculated Netflix’s stock price using expected future earnings per share and a hypothetical dividend. The value of the analysis yielded a stock price of $318.80. Cost of Debt vs. Beta Relative Valuation We tested the Cost of Debt to Beta to measure how stock price We used a relative valuation model to compare Netflix to changed in relation to these values. We found that price is multiple competitors. These competitors included: Amazon, more sensitive to Beta, as this reflects how correlated the stock Best Buy, TELLUS Corporation, Disney, 21st Century Fox, is to overall market movements. Time Warner, CBS, and DISH Network Corp. Unfortunately, Netflix is the only pure-play internet streaming company that is currently publicly traded in the U.S. Accounting for this fact, we tried to choose competitors that matched Netflix in size and/or services. For example, Amazon is a much larger company but directly competes with Netflix, or Best Buy does not have a streaming service but is of a similar size. We chose CV Growth of NOPLAT vs. Beta to focus strictly on price and earnings multiples for our relative valuation. From our analysis, we discovered that We tested the CV growth of NOPLAT to the effective tax rate Netflix is priced very highly compared to its peers, owing to to measure how stock price changed in relation to these the recent jump in stock price that it experienced. With a values. We found that price is more sensitive to Beta, as this forward P/E of 102.4 and a forward PEG of 384, there should reflects how correlated the stock is to overall market be some concern that Netflix is valued very highly, maybe too movements, and tax rate has relatively little effect on earnings highly. However, we believe that Netflix’s high valuation is of a firm, and therefore, stock price. simply the market pricing in Netflix’s strategy for future success. We predict that Netflix will meet market expectations and “grow into” its currently high valuation.

Sensitivity Analysis

We also analyzed Netflix using sensitivity tests. These test consist of us using small changes in the values of some of our calculation inputs to see how they would affect stock price. The results are as follows:

CV ROIC vs. Equity Risk Premium We tested the CV ROIC to the Equity Risk Premium to measure how stock price changed in relation to these values. We found that price is more sensitive to changes in equity risk premium than CV ROIC.

WACC vs. CV Growth of NOPLAT

We tested the WACC to the CV growth of NOPLAT to measure how stock price changed in relation to these values. We found that price is almost equally as sensitive to these two

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Netflix (NYSE: NFLX) Key Assumptions of Valuation Model

Ticker Symbol NFLX Current Share Price $192.02 Current Model Date 11/10/2017 Fiscal Year End Dec. 31 Share Outstanding 428.822M

Pre-Tax Cost of Debt 5.79% Beta 1.225 Risk-Free Rate 2.95% Equity Risk Premium 4.52% CV Growth of NOPLAT 3.62% CV Growth of EPS 0 Marginal Tax Rate 35.00% Effective Tax Rate 0 Cost of Equity 8.49% WACC 8.27% CV ROIC 46.49% DCF Price $ 231.34 EP Price $ 231.34

Adjusted Price (November 10, 2017) $ 248.13 Netflix (NYSE: NFLX) Revenue Decomposition

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E Total Global Subscribers 57,391 74,762 93,796 116,485 143,389 169,711 196,514 227,328 263,244 304,805 352,646 402,879 461,329 520,403 Total Global Paying Subscribers Revenues $ 5,504,656 $ 6,779,511 $ 8,830,669 $11,727,338 $15,151,768 $18,447,302 $21,552,306 $24,900,489 $28,965,359 $33,677,550 $38,989,578 $44,642,409 $51,257,484 $58,106,930 Domestic Streaming Total Subscribers 39,114 44,738 49,431 54,374 59,540 64,898 70,739 76,398 82,128 87,466 91,840 96,432 101,253 106,316 Total Paying Subscribers 37,698 43,401 47,905 52,743 57,753 62,951 68,617 74,106 79,664 84,842 89,084 93,539 98,216 103,126 Average monthly revenue per paying subscritpion $ 8.14 8.50 9.21 9.30 10.70 11.50 11.90 12.23 12.47 12.69 12.88 13.04 13.21 13.37 Revenues $ 3,431,434 $ 4,180,339 $ 5,077,307 $ 5,887,434 $ 7,413,752 $ 8,687,063 $ 9,800,310 $10,875,405 $11,924,881 $12,922,248 $13,771,886 $14,641,236 $15,565,465 $16,548,034 International Streaming Total Subscribers 18,277 30,024 44,365 62,111 83,850 104,812 125,775 150,930 181,116 217,339 260,807 306,448 360,076 414,087 Total Paying Subscribers 16,778 27,438 41,185 57,453 77,561 96,951 116,342 139,610 167,532 201,038 241,246 283,464 333,070 383,031 Average monthly revenue per paying subscritpion $ 8.34 7.41 7.81 7.89 7.97 8.17 8.27 8.37 8.48 8.60 8.71 8.82 8.93 9.04 Revenues $ 1,308,061 $ 1,953,435 $ 3,211,095 $ 5,438,309 $ 7,415,135 $ 9,500,641 $11,543,279 $14,025,084 $17,040,478 $20,755,302 $25,217,692 $30,001,172 $35,692,020 $41,558,896 Domestic DVD Total Subscribers 5,767 4,904 4,114 3,291 2,633 2,106 1,685 ------Total Paying Subscribers 5,668 4,787 4,029 3,258 2,607 2,085 1,668 ------Average monthly revenue per paying subscritpion $ 10.29 10.30 10.22 10.27 10.32 10.37 10.43 ------Revenues $ 765,161 $ 645,737 $ 542,267 $ 401,594 $ 322,882 $ 259,597 $ 208,716 ------Netflix (NYSE: NFLX) Income Statement

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E Revenues $ 5,504,656 $ 6,779,511 $ 8,830,669 $ 11,727,338 $ 15,151,768 $ 18,447,302 $ 21,552,306 $ 24,900,489 $ 28,965,359 $ 33,677,550 $ 38,989,578 $ 44,642,409 $ 51,257,484 $ 58,106,930 Cost of in house productions 970,962 1,044,431 1,104,923 4,984,119 6,060,707 6,456,556 7,543,307 8,715,171 10,137,876 11,787,143 13,646,352 15,624,843 17,940,120 20,337,426 Amoritization of streaming content assets 2,656,279 3,405,382 4,788,498 2,647,447 3,295,510 3,873,933 4,283,521 4,762,219 5,213,765 5,683,087 6,170,101 6,696,361 7,304,192 7,931,596 Amoritization of DVD content assets 71,491 79,380 78,952 117,273 151,518 184,473 215,523 249,005 289,654 336,776 389,896 446,424 512,575 581,069 Depreciation of PPE 54,028 62,283 57,528 60,470 63,494 66,669 70,002 73,502 77,177 81,036 85,088 89,342 93,809 98,500 Marketing 607,186 824,092 991,078 1,172,734 1,515,177 1,844,730 2,155,231 2,490,049 2,751,709 3,030,980 3,411,588 3,906,211 4,485,030 5,084,356 Technology and development 472,321 650,788 852,098 1,055,460 1,363,659 1,660,257 1,939,708 2,241,044 2,606,882 3,030,980 3,509,062 4,017,817 4,613,174 5,229,624 General and administrative 269,741 407,329 577,799 938,187 1,212,141 1,475,784 1,724,184 1,929,788 2,128,954 2,357,429 2,729,270 3,124,969 3,588,024 4,067,485 Operating income $ 402,648 $ 305,826 $ 379,793 $ 751,648 $ 1,489,562 $ 2,884,900 $ 3,620,830 $ 4,439,711 $ 5,759,343 $ 7,370,122 $ 9,048,221 $10,736,442 $12,720,562 $14,776,874 Other income (expense): Interest and other income (expense) (3,060) (31,225) 30,828 30,828 30,828 30,828 30,828 30,828 30,828 30,828 30,828 30,828 30,828 30,828 Interest expense (50,219) (132,716) (150,114) (194,794) (260,503) (372,205) (437,477) (484,033) (539,214) (592,259) (648,256) (707,657) (774,486) (853,709) Income before income taxes 349,369 141,885 260,507 587,682 1,259,887 2,543,523 3,214,181 3,986,507 5,250,957 6,808,691 8,430,793 10,059,613 11,976,904 13,953,993 Provision for income taxes 82,570 19,244 73,829 205,689 440,960 890,233 1,124,963 1,395,277 1,837,835 2,383,042 2,950,777 3,520,865 4,191,916 4,883,897 Net income $ 266,799 $ 122,641 $ 186,678 $ 381,993 $ 818,927 $ 1,653,290 $ 2,089,218 $ 2,591,230 $ 3,413,122 $ 4,425,649 $ 5,480,015 $ 6,538,748 $ 7,784,988 $ 9,070,095

Earnings per share: Basic $ 0.63 $ 0.29 $ 0.44 $ 0.88 $ 1.88 $ 3.75 $ 4.70 $ 5.78 $ 7.54 $ 9.69 $ 11.90 $ 14.08 $ 16.62 $ 19.20

Weighted-average common shares outstanding: Basic 420,544 425,889 428,822 432,776 436,731 440,685 444,639 448,593 452,548 456,502 460,456 464,410 468,365 472,319 Netflix (NYSE: NFLX) Balance Sheet

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E Assets Cash and cash equivalents $ 1,113,608 $ 1,809,330 $ 1,467,576 $ 959,738 $ 727,647 $ 1,965,937 $ 4,172,722 $ 7,155,729 $ 10,934,491 $ 16,741,041 $ 22,961,986 $ 29,901,797 $ 39,235,224 $ 49,639,438 Short-term investments 494,888 501,385 266,206 295,204 334,443 390,855 460,504 552,164 683,053 873,937 1,165,846 1,601,194 2,258,735 3,308,783 Current content assets, net 2,125,702 2,905,998 3,726,307 6,332,763 12,121,415 13,835,476 15,086,614 16,807,830 18,103,349 19,364,591 20,664,476 22,321,204 24,347,305 26,148,119 Other current assets 206,271 215,127 260,202 322,502 416,674 507,301 592,688 684,763 796,547 926,133 1,072,213 1,227,666 1,409,581 1,597,941 Total current assets 3,940,469 5,431,840 5,720,291 7,910,206 13,600,178 16,699,570 20,312,529 25,200,487 30,517,440 37,905,702 45,864,522 55,051,862 67,250,845 80,694,279 Non-current content assets, net 2,773,326 4,312,817 7,274,501 8,795,503 9,848,649 11,990,746 13,470,191 14,940,293 16,655,081 18,522,653 20,469,528 22,321,204 24,347,305 26,729,188 Property and equipment, net 149,875 173,412 250,395 262,915 276,060 289,864 304,357 319,575 335,553 352,331 369,947 388,445 407,867 428,260 Other non-current assets 192,981 284,802 341,423 351,820 378,794 461,183 484,927 560,261 622,755 673,551 701,812 781,242 845,748 929,711 Total assets $ 7,056,651 $ 10,202,871 $ 13,586,610 $ 17,320,445 $ 24,103,682 $ 29,441,362 $ 34,572,003 $ 41,020,616 $ 48,130,830 $ 57,454,236 $ 67,405,810 $ 78,542,753 $ 92,851,766 $ 108,781,439 Liabilities and Stockholders' Equity: Current content liabilities $ 2,117,241 $ 2,789,023 $ 3,632,711 $ 4,690,935 $ 7,197,090 $ 8,301,286 $ 9,159,730 $ 10,582,708 $ 11,586,143 $ 13,471,020 $ 14,621,092 $ 15,624,843 $ 17,940,120 $ 20,337,426 Accounts payable 201,581 253,491 312,842 410,457 530,312 645,656 754,331 871,517 1,013,788 1,178,714 1,364,635 1,562,484 1,794,012 2,033,743 Accrued expenses 69,746 140,389 197,632 263,865 378,794 461,183 538,808 622,512 724,134 841,939 974,739 1,116,060 1,281,437 1,452,673 Deferred revenue 274,586 346,721 443,472 586,367 757,588 922,365 1,077,615 1,245,024 1,448,268 1,683,878 1,949,479 2,232,120 2,562,874 2,905,347 Total current liabilities 2,663,154 3,529,624 4,586,657 5,951,624 8,863,784 10,330,489 11,530,484 13,321,762 14,772,333 17,175,551 18,909,945 20,535,508 23,578,443 26,729,188 Non-current content liabilities 1,575,832 2,026,360 2,894,654 3,518,201 4,545,530 5,534,191 6,465,692 7,470,147 8,689,608 10,103,265 11,696,873 13,392,723 15,377,245 17,432,079 Long-term debt 900,000 2,371,362 3,364,311 4,499,194 6,428,410 7,555,742 8,359,802 9,312,844 10,228,993 11,196,129 12,222,052 13,376,263 14,744,549 16,264,050 Other non-current liabilities 59,957 52,099 61,188 205,228 208,820 212,474 216,193 219,976 223,826 227,742 231,728 235,783 239,909 244,108 Total liabilities 5,198,943 7,979,445 10,906,810 14,174,248 20,046,545 23,632,896 26,572,170 30,324,728 33,914,759 38,702,687 43,060,598 47,540,277 53,940,147 60,669,425 Stockholders' equity: Additional Paid in Capital 1,042,810 1,324,809 1,599,762 1,679,750 1,763,738 1,851,924 1,944,521 2,041,747 2,143,834 2,251,026 2,363,577 2,481,756 2,605,844 2,736,136 Accumulated other comprehensive loss (4,446) (43,308) (48,565) (44,150) (36,123) (26,271) (16,718) (9,119) (4,145) (1,507) (411) (75) (7) - Retained earnings 819,284 941,925 1,128,603 1,510,596 2,329,523 3,982,813 6,072,030 8,663,260 12,076,382 16,502,031 21,982,046 28,520,795 36,305,782 45,375,878 Total stockholders' equity 1,857,708 2,223,426 2,679,800 3,146,197 4,057,138 5,808,466 7,999,833 10,695,888 14,216,071 18,751,550 24,345,212 31,002,476 38,911,619 48,112,014 Total liabilities and stockholders' equity $ 7,056,651 $ 10,202,871 $ 13,586,610 $ 17,320,445 $ 24,103,682 $ 29,441,362 $ 34,572,003 $ 41,020,616 $ 48,130,830 $ 57,454,236 $ 67,405,810 $ 78,542,753 $ 92,851,766 $ 108,781,439 Netflix (NYSE: NFLX) Cash Flow Statement

Fiscal Years Ending Dec. 31 2014 2015 2016 Cash flows from operating activities: Net income $ 266,799 $ 122,641 $ 186,678 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Additions to streaming content assets (3,773,019) (5,771,652) (8,653,286) Change in streaming content liabilities 593,125 1,162,413 1,772,650 Amortization of streaming content assets 2,656,279 3,405,382 4,788,498 Amortization of DVD content assets 71,491 79,380 78,952 Depreciation and amortization of property, equipment and intangibles 54,028 62,283 57,528 Stock-based compensation expense 115,239 124,725 173,675 Excess tax benefits from stock-based compensation (89,341) (80,471) (65,121) Other non-cash items 15,282 31,628 40,909 Less: Change in Deferred Tax Liability (30,063) (58,655) (46,847) Loss on extinguishment of debt - - - Changes in operating assets and liabilities: Prepaid Content - - - Other current assets (9,198) 18,693 46,970 Accounts payable 83,812 51,615 32,247 Accrued expenses 55,636 48,810 68,706 Deferred revenue 58,819 72,135 96,751 Other non-current assets and liabilities (52,406) (18,366) (52,294) Net cash (used in) provided by operating activites 16,483 (749,439) (1,473,984) Cash flows from investing activities: Acquisition of DVD content assets (74,790) (77,958) (77,177) Purchases of property and equipment (69,726) (91,248) (107,653) Other assets 1,334 (1,912) (941) Purchases of short-term investments (426,934) (371,915) (187,193) Proceeds from sale of short-term investments 385,300 259,079 282,484 Proceeds from maturities of short-term investments 141,950 104,762 140,245 Net cash provided by (used in) investing activites (42,866) (179,192) 49,765 Cash flows from financing activities: Proceeds from issuance of debt 400,000 1,500,000 1,000,000 Issuance costs (7,080) (17,629) (10,700) Proceeds from issuance of common stock 60,544 77,980 36,979 Excess tax benefits from stock-based compensation 89,341 80,471 65,121 Other financing activities (1,093) (545) 230 Net cash provided by financing activities 541,712 1,640,277 1,091,630 Effect of exchange rate changes on cash and cash equivalents (6,686) (15,924) (9,165) Net (decrease) increase in cash and cash equivalents 508,643 695,722 (341,754) Cash and cash equivalents, beginning of year 604,965 1,113,608 1,809,330 Cash and cash equivalents, end of year $ 1,113,608 $ 1,809,330 $ 1,467,576 Netflix (NYSE: NFLX) Cash Flow Forecast

Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E Cash flows from operating activities: Net income 381,993 818,927 1,653,290 2,089,218 2,591,230 3,413,122 4,425,649 5,480,015 6,538,748 7,784,988 9,070,095 Adjustments to reconcile net income to net cash Add: Depreciation 60,470 63,494 66,669 70,002 73,502 77,177 81,036 85,088 89,342 93,809 98,500 Add: Ammortization 2,764,720 3,447,027 4,058,406 4,499,044 5,011,223 5,503,418 6,019,862 6,559,996 7,142,785 7,816,766 8,512,665 Changes in Working Capital Change in other current assets (62,300) (94,172) (90,627) (85,388) (92,075) (111,784) (129,585) (146,081) (155,453) (181,915) (188,360) Change in Accounts payable 97,615 119,855 115,344 108,675 117,186 142,270 164,927 185,921 197,849 231,528 239,731 Change in content liabilities 1,681,772 3,533,484 2,092,856 1,789,945 2,427,433 2,222,897 3,298,534 2,743,680 2,699,601 4,299,799 4,452,140 Change in accrued expenses 66,233 114,929 82,388 77,625 83,705 101,622 117,805 132,801 141,321 165,377 171,236 Change in deferred revenue 142,895 171,222 164,777 155,250 167,409 203,243 235,610 265,601 282,642 330,754 342,472 Change in other non-current liabilities 144,040 3,591 3,654 3,718 3,783 3,850 3,917 3,985 4,055 4,126 4,198 Change in other non-current assets (10,397) (26,974) (82,388) (23,744) (75,334) (62,494) (50,796) (28,261) (79,430) (64,506) (83,962) Net Cash Provided by Operating Activties 5,267,042 8,151,383 8,064,368 8,684,346 10,308,062 11,493,321 14,166,958 15,282,746 16,861,461 20,480,726 22,618,715 Cash from Investing Activites Addtions to content library (6,892,178) (10,288,825) (7,914,565) (7,229,627) (8,202,542) (8,513,725) (9,148,675) (9,806,757) (10,651,190) (11,868,968) (12,695,361) Short-Term Investments (28,998) (39,239) (56,412) (69,648) (91,660) (130,889) (190,884) (291,909) (435,348) (657,541) (1,050,047) Capital Expenditures (72,990) (76,640) (80,472) (84,495) (88,720) (93,156) (97,814) (102,704) (107,840) (113,232) (118,893) Net Cash Used for Investing Activities (6,994,166) (10,404,704) (8,051,449) (7,383,770) (8,382,922) (8,737,770) (9,437,374) (10,201,371) (11,194,377) (12,639,740) (13,864,302) Change from Financing Activities Changes in Current Portion of Long Term Debt 1,139,298 1,937,243 1,137,184 813,614 960,641 921,123 969,773 1,027,019 1,154,548 1,368,354 1,519,508 Proceeds from issuance of common stock 79,988 83,988 88,187 92,596 97,226 102,087 107,192 112,551 118,179 124,088 130,292 Net cash provided by financing activities 1,219,286 2,021,230 1,225,371 906,210 1,057,867 1,023,211 1,076,965 1,139,570 1,272,727 1,492,442 1,649,800 Net (decrease) increase in cash and cash equivalents (507,838) (232,091) 1,238,290 2,206,785 2,983,007 3,778,762 5,806,550 6,220,945 6,939,810 9,333,427 10,404,214 Cash and cash equivalents, beginning of year 1,467,576 959,738 727,647 1,965,937 4,172,722 7,155,729 10,934,491 16,741,041 22,961,986 29,901,797 39,235,224 Cash and cash equivalents, end of year 959,738 727,647 1,965,937 4,172,722 7,155,729 10,934,491 16,741,041 22,961,986 29,901,797 39,235,224 49,639,438 Netflix (NYSE: NFLX) Common Size Income Statement

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E Revenues 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Cost of in house productions 17.64% 15.41% 12.51% 42.50% 40.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% Amoritization of streaming content assets 48.26% 50.23% 54.23% 22.58% 21.75% 21.00% 19.88% 19.13% 18.00% 16.88% 15.83% 15.00% 14.25% 13.65% Amoritization of DVD content assets 1.30% 1.17% 0.89% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Depreciation of PPE 0.98% 0.92% 0.65% 0.52% 0.42% 0.36% 0.32% 0.30% 0.27% 0.24% 0.22% 0.20% 0.18% 0.17% Marketing 11.03% 12.16% 11.22% 10.00% 10.00% 10.00% 10.00% 10.00% 9.50% 9.00% 8.75% 8.75% 8.75% 8.75% Technology and development 8.58% 9.60% 9.65% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% General and administrative 4.90% 6.01% 6.54% 8.00% 8.00% 8.00% 8.00% 7.75% 7.35% 7.00% 7.00% 7.00% 7.00% 7.00% Operating income 7.31% 4.51% 4.30% 6.41% 9.83% 15.64% 16.80% 17.83% 19.88% 21.88% 23.21% 24.05% 24.82% 25.43% Other income (expense): Interest expense 0.91% 1.96% 1.70% 1.66% 1.72% 2.02% 2.03% 1.94% 1.86% 1.76% 1.66% 1.59% 1.51% 1.47% Interest and other income (expense) -0.06% -0.46% 0.35% 0.26% 0.20% 0.17% 0.14% 0.12% 0.11% 0.09% 0.08% 0.07% 0.06% 0.05% Loss on extinguishment of debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Income before income taxes 6.35% 2.09% 2.95% 5.01% 8.32% 13.79% 14.91% 16.01% 18.13% 20.22% 21.62% 22.53% 23.37% 24.01% Net income 4.85% 1.81% 2.11% 3.26% 5.40% 8.96% 9.69% 10.41% 11.78% 13.14% 14.06% 14.65% 15.19% 15.61% Netflix (NYSE: NFLX) Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E Assets: Cash and cash equivalents 8.99% 15.85% 8.04% 13.83% 20.23% 26.69% 16.62% 8.18% 4.80% 10.66% 19.36% 28.74% 37.75% 49.71% 58.89% 66.98% 76.55% 85.43% Short-term investments 7.21% 9.04% 12.68% 13.61% 8.99% 7.40% 3.01% 2.52% 2.21% 2.12% 2.14% 2.22% 2.36% 2.60% 2.99% 3.59% 4.41% 5.69% Current content assets, net 8.37% 28.70% 37.91% 39.01% 38.62% 42.86% 42.20% 54.00% 80.00% 75.00% 70.00% 67.50% 62.50% 57.50% 53.00% 50.00% 47.50% 45.00% Prepaid content 2.88% 1.75% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other current assets 2.02% 1.79% 3.45% 3.47% 3.75% 3.17% 2.95% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% Total current assets 29.47% 57.13% 62.08% 69.92% 71.58% 80.12% 64.78% 67.45% 89.76% 90.53% 94.25% 101.20% 105.36% 112.55% 117.63% 123.32% 131.20% 138.87% Non-current content assets, net 8.37% 32.67% 41.73% 47.80% 50.38% 63.62% 82.38% 75.00% 65.00% 65.00% 62.50% 60.00% 57.50% 55.00% 52.50% 50.00% 47.50% 46.00% Property and equipment, net 5.95% 4.25% 3.65% 3.05% 2.72% 2.56% 2.84% 2.24% 1.82% 1.57% 1.41% 1.28% 1.16% 1.05% 0.95% 0.87% 0.80% 0.74% Other non-current assets 1.63% 1.72% 2.48% 2.95% 3.51% 4.20% 3.87% 3.00% 2.50% 2.50% 2.25% 2.25% 2.15% 2.00% 1.80% 1.75% 1.65% 1.60% Total assets 45.41% 95.78% 109.94% 123.73% 128.19% 150.50% 153.86% 147.69% 159.08% 159.60% 160.41% 164.74% 166.17% 170.60% 172.88% 175.94% 181.15% 187.21% Liabilities and Stockholders' Equity: Current content liabilities 7.80% 28.86% 37.87% 40.60% 38.46% 41.14% 41.14% 40.00% 47.50% 45.00% 42.50% 42.50% 40.00% 40.00% 37.50% 35.00% 35.00% 35.00% Accounts payable 2.50% 2.74% 2.40% 2.48% 3.66% 3.74% 3.54% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% Accrued expenses 1.78% 1.99% 1.47% 1.23% 1.27% 2.07% 2.24% 2.25% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Deferred revenue 5.88% 4.64% 4.70% 4.93% 4.99% 5.11% 5.02% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Total current liabilities 17.97% 38.23% 46.43% 49.24% 48.38% 52.06% 51.94% 50.75% 58.50% 56.00% 53.50% 53.50% 51.00% 51.00% 48.50% 46.00% 46.00% 46.00% Non-current content liabilities 2.23% 23.08% 29.83% 30.76% 28.63% 29.89% 32.78% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% Long-term debt 9.25% 6.24% 5.54% 11.43% 16.35% 34.98% 38.10% 38.37% 42.43% 40.96% 38.79% 37.40% 35.31% 33.25% 31.35% 29.96% 28.77% 27.99% Long-term debt due to related party 0.00% 6.24% 5.54% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other non-current liabilities 2.55% 1.93% 1.96% 1.81% 1.09% 0.77% 0.69% 1.75% 1.38% 1.15% 1.00% 0.88% 0.77% 0.68% 0.59% 0.53% 0.47% 0.42% Total liabilities 31.99% 75.72% 89.30% 93.24% 94.45% 117.70% 123.51% 120.87% 132.30% 128.11% 123.29% 121.78% 117.09% 114.92% 110.44% 106.49% 105.23% 104.41% Stockholders' equity: Preferred stock 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Additional Paid in Capital 2.39% 6.84% 8.36% 17.77% 18.94% 19.54% 18.12% 14.32% 11.64% 10.04% 9.02% 8.20% 7.40% 6.68% 6.06% 5.56% 5.08% 4.71% Accumulated other comprehensive loss 0.03% 0.02% 0.08% 0.08% -0.08% -0.64% -0.55% -0.38% -0.24% -0.14% -0.08% -0.04% -0.01% 0.00% 0.00% 0.00% 0.00% 0.00% Retained earnings 10.99% 13.20% 12.19% 12.63% 14.88% 13.89% 12.78% 12.88% 15.37% 21.59% 28.17% 34.79% 41.69% 49.00% 56.38% 63.89% 70.83% 78.09% Total stockholders' equity 13.42% 20.06% 20.63% 30.48% 33.75% 32.80% 30.35% 26.83% 26.78% 31.49% 37.12% 42.95% 49.08% 55.68% 62.44% 69.45% 75.91% 82.80% Total liabilities and stockholders' equity 45.41% 95.78% 109.94% 123.73% 128.19% 150.50% 153.86% 147.69% 159.08% 159.60% 160.41% 164.74% 166.17% 170.60% 172.88% 175.94% 181.15% 187.21% Netflix (NYSE: NFLX) Value Driver Estimation

Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E Assumptions Marginal Tax Rate 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% WACC 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% Normal Cash (% of Sales) 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% Cost of Debt 5.79% 5.79% 5.79% 5.79% 5.79% 5.79% 5.79% 5.79% 5.79% 5.79% 5.79% 5.79% 5.79% 5.79% 5.79% 5.79% 5.79% 5.79%

NOPLAT EBITA Net Sales 2,162,625 3,204,577 3,609,282 4,374,562 5,504,656 6,779,511 8,830,669 11,727,338 15,151,768 18,447,302 21,552,306 24,900,489 28,965,359 33,677,550 38,989,578 44,642,409 51,257,484 58,106,930 Less: Cost of Revenues - 3,250,329 3,640,630 4,368,133 3,627,241 4,449,813 5,893,421 7,631,565 9,356,217 10,330,489 11,826,828 13,477,390 15,351,640 17,470,229 19,816,453 22,321,204 25,244,311 28,269,021 Less: Marketing 293,839 381,269 439,208 469,942 607,186 824,092 991,078 1,172,734 1,515,177 1,844,730 2,155,231 2,490,049 2,751,709 3,030,980 3,411,588 3,906,211 4,485,030 5,084,356 Less: Technology & Development 163,329 259,033 329,008 378,769 472,321 650,788 852,098 1,055,460 1,363,659 1,660,257 1,939,708 2,241,044 2,606,882 3,030,980 3,509,062 4,017,817 4,613,174 5,229,624 Less: General & Administrative 64,461 148,306 139,016 180,301 269,741 407,329 577,799 938,187 1,212,141 1,475,784 1,724,184 1,929,788 2,128,954 2,357,429 2,729,270 3,124,969 3,588,024 4,067,485 Add: Implied Interest on Operating Leases - 3,738 6,363 8,864 9,594 22,645 27,694 31,848 36,625 41,203 45,323 49,855 54,841 60,325 66,357 72,993 80,292 88,322 EBITA 1,640,996 (830,622) (932,217) (1,013,719) 537,761 470,134 543,967 961,239 1,741,199 3,177,244 3,951,678 4,812,074 6,181,014 7,848,258 9,589,562 11,345,201 13,407,238 15,544,765

Less: Adjusted Taxes: Provision for Income Taxes 106,843 133,396 13,328 58,671 82,570 19,244 73,829 205,689 440,960 890,233 1,124,963 1,395,277 1,837,835 2,383,042 2,950,777 3,520,865 4,191,916 4,883,897 Add: Tax Shield on Interest Expense 6,870 7,009 6,995 10,200 17,577 46,451 52,540 68,178 91,176 130,272 153,117 169,411 188,725 207,291 226,890 247,680 271,070 298,798 Add: Tax Shield on Implied Lease Interest - 1,308 2,227 3,102 3,358 7,926 9,693 11,147 12,819 14,421 15,863 17,449 19,194 21,114 23,225 25,548 28,102 30,913 Less: Tax on Other Income 1,289 1,218 166 - - - 10,790 10,790 10,790 10,790 10,790 10,790 10,790 10,790 10,790 10,790 10,790 10,790 Less: Tax on Legal Settlement - 3,150 ------Less: Total Adjusted Taxes 112,424 137,345 22,384 71,973 103,505 73,620 125,272 274,223 534,165 1,024,136 1,283,154 1,571,348 2,034,964 2,600,656 3,190,102 3,783,302 4,480,299 5,202,819

Plus: Change in Deferred Tax Liabilities ------NOPLAT 1,528,572 (967,968) (954,601) (1,085,692) 434,257 396,514 418,695 687,016 1,207,033 2,153,108 2,668,525 3,240,725 4,146,050 5,247,602 6,399,459 7,561,899 8,926,939 10,341,947

Invested Capital Operating Current Assets: Normal Cash 356,833 528,755 595,532 721,803 908,268 1,118,619 1,457,060 1,935,011 2,500,042 3,043,805 3,556,130 4,108,581 4,779,284 5,556,796 6,433,280 7,365,997 8,457,485 9,587,643 Current Content Assets, net 361,979 1,966,643 2,874,170 3,797,492 4,899,028 7,218,815 11,000,808 15,128,266 21,970,064 25,826,223 28,556,805 31,748,123 34,758,430 37,887,244 41,134,005 44,642,409 48,694,610 52,877,306 Prepaid Content 62,217 56,007 ------Other Current Assets 43,621 57,330 124,551 151,937 206,271 215,127 260,202 322,502 416,674 507,301 592,688 684,763 796,547 926,133 1,072,213 1,227,666 1,409,581 1,597,941 Operating Current Assets 824,650 2,608,735 3,594,253 4,671,232 6,013,567 8,552,561 12,718,070 17,385,779 24,886,779 29,377,328 32,705,624 36,541,468 40,334,262 44,370,172 48,639,498 53,236,073 58,561,676 64,062,890

Operating Current Liabilities: Current Content Liabilities 216,874 1,664,334 2,443,469 3,121,573 3,693,073 4,815,383 6,527,365 8,209,137 11,742,620 13,835,476 15,625,422 18,052,855 20,275,751 23,574,285 26,317,965 29,017,566 33,317,365 37,769,505 Accounts Payable 54,129 87,860 86,468 108,435 201,581 253,491 312,842 410,457 530,312 645,656 754,331 871,517 1,013,788 1,178,714 1,364,635 1,562,484 1,794,012 2, 033,743 Accrued Expenses 38,572 63,693 53,139 54,018 69,746 140,389 197,632 263,865 378,794 461,183 538,808 622,512 724,134 841,939 974,739 1,116,060 1,281,437 1,452,673 Deferred Revenue 127,183 148,796 169,472 215,767 274,586 346,721 443,472 586,367 757,588 922,365 1,077,615 1,245,024 1,448,268 1,683,878 1,949,479 2,232,120 2,562,874 2,905,347 Operating Current Liabilities 436,758 1,964,683 2,752,548 3,499,793 4,238,986 5,555,984 7,481,311 9,469,825 13,409,315 15,864,680 17,996,175 20,791,908 23,461,941 27,278,816 30,606,819 33,928,231 38,955,688 44,161,267

Net Operating Working Capital 387,892 644,052 841,705 1,171,439 1,774,581 2,996,577 5,236,759 7,915,953 11,477,464 13,512,649 14,709,449 15,749,559 16,872,321 17,091,357 18,032,680 19,307,842 19,605,988 19,901,624

Plus: Net PPE 128,570 136,353 131,681 133,605 149,875 173,412 250,395 262,915 276,060 289,864 304,357 319,575 335,553 352,331 369,947 388,445 407,867 428,260

Plus: Long-Term Content Assets Less: Long-Term Content Liabilities Plus: PV of Operating Leases 64,552 67,995 109,900 153,089 165,706 391,112 478,299 550,044 632,550 711,619 782,781 861,059 947,165 1,041,881 1,146,070 1,260,677 1,386,744 1,525,419 Plus: Other Operating Assets 35,293 55,052 89,410 129,124 192,981 284,802 341,423 351,820 378,794 461,183 484,927 560,261 622,755 673,551 701,812 781,242 845,748 929,711 Less: Other Operating Liabilities 55,145 61,703 70,669 79,209 59,957 52,099 61,188 205,228 208,820 212,474 216,193 219,976 223,826 227,742 231,728 235,783 239,909 244,108 Invested Capital 616,307 903,452 1,172,695 1,587,256 2,283,144 3,845,904 6,306,876 9,080,732 12,764,869 14,975,314 16,281,513 17,490,454 18,777,795 19,159,120 20,250,509 21,738,205 22,246,347 22,785,013

Beg. Invested Capital 616,307 903,452 1,172,695 1,587,256 2,283,144 3,845,904 6,306,876 9,080,732 12,764,869 14,975,314 16,281,513 17,490,454 18,777,795 19,159,120 20,250,509 21,738,205 22,246,347 ROIC 0.00% -157.06% -105.66% -92.58% 27.36% 17.37% 10.89% 10.89% 13.29% 16.87% 17.82% 19.90% 23.70% 27.95% 33.40% 37.34% 41.07% 46.49% WACC 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% EP -$50,953 -$1,018,921 -$1,029,294 -$1,182,644 $303,031 $207,756 $100,736 $165,597 $456,287 $1,097,777 $1,430,446 $1,894,657 $2,700,033 $3,695,155 $4,815,486 $5,887,696 $7,129,741 $8,502,738

NOPLAT (967,968) (954,601) (1,085,692) 434,257 396,514 418,695 687,016 1,207,033 2,153,108 2,668,525 3,240,725 4,146,050 5,247,602 6,399,459 7,561,899 8,926,939 10,341,947 Less: Change in Invested Capital 287,145 269,243 414,561 695,887 1,562,760 2,460,973 2,773,855 3,684,138 2,210,444 1,306,200 1,208,941 1,287,341 381,325 1,091,389 1,487,696 508,142 538,666 FCF (1,255,113) (1,223,844) (1,500,254) (261,630) (1,166,246) (2,042,278) (2,086,840) (2,477,105) (57,336) 1,362,325 2,031,785 2,858,709 4,866,277 5,308,070 6,074,203 8,418,797 9,803,281 Netflix (NYSE: NFLX) Weighted Average Cost of Capital (WACC) Estimation

Cost of Capital Assumptions Enterprise Value Risk Free Rate 2.95% MV Debt 3,535 Market Risk Premium 4.52% PV Operating Leases 478 Beta 1.23 Total Debt 4,014 Cost of Equity 8.49% Market Cap 82,342 Debt Rating BB- Default Spread 2.84% Enterprise Value 86,356 Pre-Tax Cost of Debt 5.79% Tax Rate 35.00% After-Tax Cost of Debt 3.76%

Capital Weights MV Weight of Equity 95.35% MV Weight of Debt 4.65%

WACC 8.27% Netflix (NYSE: NFLX) Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 3.70% CV ROIC 46.49% WACC 8.27% Cost of Equity 8.49%

DCF Model Fiscal Years Ending Dec. 31 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E NOPLAT 418,695 687,016 1,207,033 2,153,108 2,668,525 3,240,725 4,146,050 5,247,602 6,399,459 7,561,899 8,926,939 10,341,947 Less: Change in Invested Capital 2,460,973 2,773,855 3,684,138 2,210,444 1,306,200 1,208,941 1,287,341 381,325 1,091,389 1,487,696 508,142 538,666 Free Cash Flow (FCF) (2,042,278) (2,086,840) (2,477,105) (57,336) 1,362,325 2,031,785 2,858,709 4,866,277 5,308,070 6,074,203 8,418,797 9,803,281 Continuing Value (CV) 208,405,174 Discount Factor 1 2 3 4 5 6 7 8 9 10 10 PV of FCF (1,927,486) (2,113,238) (45,179) 991,491 1,365,802 1,774,934 2,790,687 2,811,596 2,971,718 3,804,262 94,173,529

Enterprise Value 106,598,118 Add: Excess Cash Less: PV Operating Leases 478,299 Add: Short term investments 282,484 Less: Notes Payable 3,364,311 Less: Employee Stock Options 3,833,909 Value of Equity 99,204,082 Shares Outstanding 428,822

Intrinsic Value of Stock $ 231.34

EP Model Fiscal Years Ending Dec. 31 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E NOPLAT 418,695 687,016 1,207,033 2,153,108 2,668,525 3,240,725 4,146,050 5,247,602 6,399,459 7,561,899 8,926,939 10,341,947 Beg. Invested Capital 3,845,904 6,306,876 9,080,732 12,764,869 14,975,314 16,281,513 17,490,454 18,777,795 19,159,120 20,250,509 21,738,205 22,246,347 ROIC 10.89% 10.89% 13.29% 16.87% 17.82% 19.90% 23.70% 27.95% 33.40% 37.34% 41.07% 46.49% WACC 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27% EP 100,736 165,597 456,287 1,097,777 1,430,446 1,894,657 2,700,033 3,695,155 4,815,486 5,887,696 7,129,741 8,502,738 Continuing Value (CV) 186,158,827 Discount Period 1 2 3 4 5 6 7 8 9 10 10 PV of EP 152,952 389,262 865,008 1,041,069 1,273,623 1,676,414 2,119,078 2,550,683 2,880,472 3,221,767 84,120,914

PV of EP 106,598,118 Value of Operating Assets Add: Excess Cash Less: PV of Operating Leases 478,299 Add: Short term investments 282,484 Less: Nortes Payable 3,364,311 Less: Employee Stock Oprtions 3,833,909 Value of Equity 99,204,082 Shares outstanding 428,822

Intrinsic Value of Stock $ 231.34 Equity Risk Premium $ 231.34 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 45.0% $ 338.68 $ 277.17 $ 232.26 $ 198.16 $ 171.49 $ 150.13 $ 132.69 45.5% $ 339.00 $ 277.43 $ 232.47 $ 198.34 $ 171.65 $ 150.27 $ 132.81 CV ROIC 46.0% $ 339.32 $ 277.69 $ 232.69 $ 198.52 $ 171.80 $ 150.40 $ 132.92 46.5% $ 339.63 $ 277.94 $ 232.89 $ 198.70 $ 171.95 $ 150.52 $ 133.03 47.0% $ 339.94 $ 278.19 $ 233.10 $ 198.87 $ 172.09 $ 150.65 $ 133.14 47.5% $ 340.24 $ 278.43 $ 233.30 $ 199.03 $ 172.23 $ 150.77 $ 133.25 48.0% $ 340.53 $ 278.67 $ 233.49 $ 199.20 $ 172.37 $ 150.89 $ 133.35

CV Growth of NOPLAT $ 231.34 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% 8.15% $ 211.55 $ 220.55 $ 230.52 $ 241.62 $ 254.06 $ 268.09 $ 284.05 8.20% $ 208.84 $ 217.61 $ 227.32 $ 238.11 $ 250.19 $ 263.80 $ 279.25 WACC 8.25% $ 206.19 $ 214.74 $ 224.19 $ 234.69 $ 246.43 $ 259.63 $ 274.59 8.30% $ 203.59 $ 211.92 $ 221.13 $ 231.35 $ 242.75 $ 255.56 $ 270.06 8.35% $ 201.04 $ 209.17 $ 218.14 $ 228.08 $ 239.16 $ 251.60 $ 265.65 8.40% $ 198.54 $ 206.47 $ 215.21 $ 224.89 $ 235.67 $ 247.74 $ 261.37

Beta $ 231.34 0.900 1.100 1.200 1.300 1.400 1.600 1.700 3.25% $ 371.02 $ 273.99 $ 240.29 $ 212.91 $ 190.26 $ 155.13 $ 141.27 3.50% $ 369.34 $ 272.98 $ 239.48 $ 212.24 $ 189.71 $ 154.73 $ 140.93 Cost of Debt 3.75% $ 367.68 $ 271.98 $ 238.67 $ 211.58 $ 189.15 $ 154.33 $ 140.58 4.00% $ 366.02 $ 270.98 $ 237.86 $ 210.92 $ 188.60 $ 153.93 $ 140.24 4.25% $ 364.38 $ 269.99 $ 237.06 $ 210.26 $ 188.06 $ 153.53 $ 139.90 4.50% $ 362.75 $ 269.00 $ 236.27 $ 209.61 $ 187.51 $ 153.14 $ 139.56

Effective Tax Rate $ 231.34 20.0% 25.0% 30.0% 35.0% 40.0% 45.00% 50.0% 3.0% $ 202.98 $ 203.74 $ 204.50 $ 205.27 $ 206.04 $ 206.82 $ 207.60 3.3% $ 211.28 $ 212.10 $ 212.92 $ 213.75 $ 214.58 $ 215.41 $ 216.25 CV Growth NOPLAT 3.5% $ 220.45 $ 221.33 $ 222.22 $ 223.11 $ 224.01 $ 224.91 $ 225.82 4.0% $ 241.98 $ 243.02 $ 244.07 $ 245.13 $ 246.20 $ 247.27 $ 248.35 4.3% $ 254.73 $ 255.88 $ 257.03 $ 258.20 $ 259.37 $ 260.55 $ 261.73 4.5% $ 269.16 $ 270.43 $ 271.71 $ 273.00 $ 274.29 $ 275.60 $ 276.92 Netflix (NYSE: NFLX) Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E EPS $ 0.88 $ 1.88 $ 3.75 $ 4.70 $ 5.78 $ 7.54 $ 9.69 $ 11.90 $ 14.08 $ 16.62 $ 19.20 Dividend Payout $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Hypothetical Dividend in CV $ 17.28

Key Assumptions CV growth 3.62% CV ROE 18.85% Cost of Equity 8.49%

Price $ 318.80 Netflix (NYSE: NFLX) Relative Valuation Models

EPS EPS Est. 5yr Ticker Company Price 2017E 2018E P/E 17 P/E 18 EPS gr. PEG 17 PEG 18 AMZN Amazon.com $1,125.35 $4.28 $7.95 262.93 141.55 18.84% 1,395.61 751.35 BBY Best Buy $56.68 $4.06 $4.27 13.96 13.27 12.20% 114.43 108.80 TU Tellus Corporation $38.24 $2.63 $2.86 14.54 13.37 7.35% 197.82 181.91 DIS Walt Disney Co. $98.31 $6.28 $6.58 15.65 14.94 7.27% 215.33 205.51 FOXA Twenty-First Century Fo $26.41 $1.99 $2.26 13.27 11.69 10.27% 129.22 113.79 TWX Time Warner Inc. $98.79 $6.22 $6.49 15.88 15.22 10.24% 155.10 148.65 CBS CBS Corp Common Stoc $56.75 $4.38 $5.00 12.96 11.35 12.65% 102.42 89.72 DISH DISH Network Corp $46.49 $2.14 $2.23 21.72 20.85 8.29% 262.05 251.48 Average 46.37 30.28 321.50 231.40

NFLX Netflix (NYSE: NFLX) $192.02 $0.88 $1.88 217.5 102.4 26.67% 815.7 384.0

Implied Relative Value: P/E (EPS17) $ 40.92 P/E (EPS18) $ 56.78 PEG (EPS17) $ 75.68 PEG (EPS18) $ 115.72 Netflix (NYSE: NFLX) Key Management Ratios

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

Liquidity Ratios Quick Ratio 0.60 0.65 0.38 0.21 0.12 0.23 0.40 0.58 0.79 1.03 1.28 1.53 1.76 1.98 Current Ratio 1.48 1.54 1.25 1.33 1.53 1.62 1.76 1.89 2.07 2.21 2.43 2.68 2.85 3.02 Operating Cash Flow Ratio 0.01 -0.21 -0.32 0.88 0.92 0.78 0.75 0.77 0.78 0.82 0.81 0.82 0.87 0.85

Activity or Asset-Management Ratios Asset Turnover Ratio 0.78 0.66 0.65 0.68 0.63 0.63 0.62 0.61 0.60 0.59 0.58 0.57 0.55 0.53 Ammortization of contracts as % of COGS

Financial Leverage Ratios Debt-to-Equity Ratio 2.80 3.59 4.07 4.51 4.94 4.07 3.32 2.84 2.39 2.06 1.77 1.53 1.39 1.26 Interest Coverage Ratio 8.02 2.30 2.53 3.86 5.72 7.75 8.28 9.17 10.68 12.44 13.96 15.17 16.42 17.31 Cash Flow to Debt 0.45 0.13 0.11 0.17 0.23 0.38 0.43 0.48 0.56 0.66 0.74 0.80 0.86 0.91

Profitability Ratios Profit Margin 0.05 0.02 0.02 0.03 0.05 0.09 0.10 0.10 0.12 0.13 0.14 0.15 0.15 0.16 Return on Assets 0.04 0.01 0.01 0.02 0.03 0.06 0.06 0.06 0.07 0.08 0.08 0.08 0.08 0.08 Return on Equity 0.14 0.06 0.07 0.12 0.20 0.28 0.26 0.24 0.24 0.24 0.23 0.21 0.20 0.19 Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014)

Operating Operating Operating Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases 2017 64,502 2016 42,545 2015 35,501 2018 76,310 2017 54,811 2016 37,078 2018 68,456 2018 58,015 2017 27,697 2019 66,603 2019 53,152 2018 19,804 2020 57,434 2020 51,844 2019 14,923 Thereafter 307,535 Thereafter 269,377 Thereafter 76,130 Total Minimum Payments 640,840 Total Minimum Payments 529,744 Total Minimum Payments 211,133 Less: Interest 162,541 Less: Interest 138,632 Less: Interest 45,427 PV of Minimum Payments 478,299 PV of Minimum Payments 391,112 PV of Minimum Payments 165,706

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 5.79% Pre-Tax Cost of Debt 5.79% Pre-Tax Cost of Debt 5.79% Number Years Implied by Year 6 Payment 5.4 Number Years Implied by Year 6 Payment 5.2 Number Years Implied by Year 6 Payment 5.1

Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 64502 60971.7 1 42545 40216.5 1 35501 33558.0 2 76310 68185.5 2 54811 48975.5 2 37078 33130.4 3 68456 57819.9 3 58015 49001.2 3 27697 23393.7 4 66603 53176.0 4 53152 42436.7 4 19804 15811.6 5 57434 43345.7 5 51844 39126.9 5 14923 11262.5 6 & beyond 57434 194800.0 6 & beyond 51844 171355.6 6 & beyond 14923 48550.3 PV of Minimum Payments 478298.9 PV of Minimum Payments 391112.3 PV of Minimum Payments 165706.4

Forecasted Leases 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 165,706 391,112 478,299 550,044 632,550 711,619 782,781 861,059 947,165 1,041,881 1,146,070 1,260,677 1,386,744 1,525,419 Growth 136% 22% 15% 15% 13% 10% 10% 10% 10% 10% 10% 10% 10% Interest % 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% Interest 22,645 27,694 31,848 36,625 41,203 45,323 49,855 54,841 60,325 66,357 72,993 80,292 88,322 Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 24,437,347 Average Time to Maturity (years): 6.18 Expected Annual Number of Options Exercised: 3,954,263

Current Average Strike Price: $ 44.83 Cost of Equity: 8.49% 3,954 Current Stock Price: $192.02 * 0.18 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E Increase in Shares Outstanding: 3,954 3,954 3,954 3,954 3,954 3,954 3,954 3,954 3,954 3,954 3,954 Average Strike Price: $ 44.83 $ 44.83 $ 44.83 $ 44.83 $ 44.83 $ 44.83 $ 44.83 $ 44.83 $ 44.83 $ 44.83 $ 44.83 Increase in Common Stock Account: 177,270 177,270 177,270 177,270 177,270 177,270 177,270 177,270 177,270 177,270 177,270

Change in Treasury Stock 0 0 0 0 0 0 0 0 0 0 0 Expected Price of Repurchased Shares: $ 192.02 $ 208.32 $ 226.00 $ 245.18 $ 265.99 $ 288.56 $ 313.05 $ 339.62 $ 368.44 $ 399.71 $ 433.63 Number of Shares Repurchased: ------

Shares Outstanding (beginning of the year) 428,822 432,776 436,731 440,685 444,639 448,593 452,548 456,502 460,456 464,410 468,365 Plus: Shares Issued Through ESOP 3,954 3,954 3,954 3,954 3,954 3,954 3,954 3,954 3,954 3,954 3,954 Less: Shares Repurchased in Treasury ------Shares Outstanding (end of the year) 432,776 436,731 440,685 444,639 448,593 452,548 456,502 460,456 464,410 468,365 472,319 VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol NFLX Current Stock Price $192.02 Risk Free Rate 2.95% Current Dividend Yield 0.00% Annualized St. Dev. of Stock Returns 43.00%

Average Average B-S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted Range 1 24,437,347 44.83 6.18 $ 156.89 $ 3,833,909,435 Total 24,437,347 $ 44.83 6.18 $ 156.89 $ 3,833,909,435