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Financial Analysis Report on
Netflix Rakeb Abraham
Financial Analytics
Mercer University
October 2022
Financial Analysis of Netflix | Rakeb Abraham
PROJECT OVERVIEW
NETFLIX NasdaqGS
Date: Yahoo Finance 10/11/2022 Industry: Streaming Entertainment Current Stock Price: $214.29 Current Market Cap: $98.471B
Valuation
DCF Relative Valuation
Price 242.99 435.31
Weights 90% 10%
Target Price 262.222
Market Profile
Closing Price $214.29
52-Week High/Low $162.71-$700.99
Market Cap $98.471B
Beta 1.43
Institutional Holdings 77.99%
Insider Holdings 1.45%
Highlights The target price indicates that the current stock price of Netflix is slightly undervalued. I issue a hold recommendation. My recommendation is driven by:
• Netflix is the leading company when it comes to online streaming services: It is a worldwide streaming service that has the highest number of subscribers. Even though Netflix lost a significant number of subscribers at the beginning of 2021, it remains the leading company in the industry.
• Netflix strategy for the coming years: Netflix plans to grow their revenue by introducing a new lower-priced ad-tier that is expected to attract new subscribers, cracking down on password sharing among subscribers, increasing production of original content, and expanding its global outreach.
• Valuation: the current intrinsic value derived from the valuation of Netflix is $242.99. The valuation was done by using the discounted cash flow (for 5 years) and relative valuation. Because it was difficult to find companies that are completely comparable to Netflix (not involved in other business sectors) I have only used 10% of the price obtained from relative valuation. I have put most of the weight on the value from the DCF model because I found it to be more representative of the financial state of Netflix.
• Threats of Netflix: the increase in competitor companies is one of the main challenges Netflix faces. Even though Netflix remains the leader in the industry, the increase in providers of the same service is a threat to Netflix. Another major risk that Netflix faces is content. Even though Netflix is investing a significant amount into original content the results it is getting is not as much as it was anticipated.
Recent News Netflix has revealed key details about its upcoming ad-supported tier. Netflix’s ad plan, named "Basic with Ads," will cost $6.99 a month in the U.S. and officially launch on Nov. 3 at 9AM PT — just ahead of Disney's ad-based offering on Dec. 8 (which will be priced at $7.99.) "Basic with Ads" will complement Netflix's existing ad-free tiers, and be available in 12 countries, including the U.S., the U.K., Australia, Brazil, Canada, France, Germany, Italy, Japan, Korea, Mexico, and Spain.
The tier will roll out in several stages with Canada and Mexico being the first two
countries to access the new offering on Nov. 1. All other eligible countries, excluding
Spain, will see a Nov. 3 launch date with Spain rounding out the rollout on Nov. 10.
Pricing will vary depending on the country.[1]
Key indicators 2019 2020 2021 2022 2023 2024
Total Revenue (in thousands) 20156447 24996056 29697844 33558564 38927934 45156403
Number of Subscribers (in thousands) 151500 192900 219700 220600 230872 233210.7
Net Profit Margin 38.28% 38.89% 41.64% 40.00% 42.00% 44.00%
Long Term debt 19537859 20409334 20246449 20246449 20246449 20246449
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Historical Stock Price of Netflix and S&P 500
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Financial Analysis of Netflix | Rakeb Abraham
Business Description of Netflix
Netflix is an American subscription based streaming service that allows customers to watch tv-shows and movies on an internet connected device. It was founded by Reed Hastings and Marc Randolph on August 29, 1997, in Scotts Valley, California.
When it first started it was a media-streaming and video rental company. It first started offering subscription service through the internet in 1999, where subscribers chose movie and television titles from Netflix’s website and the shows were then mailed to customers in the form of DVDs along with prepaid return envelopes from one of the more than 100 distribution centers. [2]
In 2010 Netflix introduced a streaming-only plan that offered unlimited streaming service. Netflix then expanded beyond the United Stated by offering the streaming only plan in Canada in 2010, in Latin America and the Caribbean in 2011 and in the United Kingdom, Ireland and Scandinavia in 2012. By 2016 its streaming service was available in more than 190 countries.[2] At the end of 2020, Netflix had 221.8 million subscribers.[3]
Figure 1: Growth in number of subscribers, and global coverage of Netflix
Company Strategy
Netflix’s product vision began with the simple goal of getting big on DVD. Then the company’s vision evolved to become leaders in the streaming market.
Netflix is currently strongly focusing on producing original content as one of its main growth strategies. [4]. In 2013, Netflix aired House of Cards which was the first of Netflix’s original content. It is now branded as Netflix Originals.[5] The company is also increasingly expanding into high-budget feature-length productions. Netflix is steering 85 percent of its expenditure towards original TV shows, movies, documentaries and other productions.[6] This is beneficial for Netflix because in many cases the cost of a cinema ticket now exceeds the company’s monthly subscription cost. [5].
Netflix also invests in making foreign language shows from around the world. It also seeks to continue popular shows that were discontinued by other distributors.[5]
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Financial Analysis of Netflix | Rakeb Abraham
Another strategy for Netflix is user experience. It continues to invest in research and development to improve its search algorithms, personalized recommendation system and cloud technology that helps the company stream its services throughout the globe. Netflix maintains a heavy focus on research and development to grow its attractiveness.[7] Netflix has also formed numerous regional mutually beneficial partnerships. It works with global telecommunications providers, cell phone companies and cable operators to sell its content. [7] One example is Vodafone. When Vodafone launched its TV service for Irish customers, it introduced a dedicated Netflix button on its remote controls.[7] Amazon is also an important partner, whose AWS cloud servers provide crucial support and hosting for all the company's digital needs. [5] Netflix also plans on introducing a lower prices ad-supported tier by the end of the year. This is expected to attract subscribers that want a lower subscription cost. Netflix also plans on cracking down on password sharing among its subscriber base.[8]
Shareholder structure
Institutional investors own more than half of the company. Hedge funds don't have many shares in Netflix. The company's largest shareholder is Capital Research and Management Company, with ownership of 13%. The Vanguard Group, Inc. is the second largest shareholder owning 7.6% of common stock, and BlackRock, Inc. holds about 6.6% of the company stock. Additionally, the company's CEO Wilmot Reed Hastings directly holds 1.1% of the total shares outstanding. The general public holds a 16% stake in Netflix.[9]
Figure 2: Ownership Structure
Corporate Management
Reed Hasting is the Chairman, President, co-CEO and the co-founder of Netflix. Theodore Sarandos is the co-CEO and content officer while Spencer Neumann is the Chief Financial Officer. [10] Netflix has a board of directors, which the CEO answers to even though he is a member of it. The Board of directors of Netflix is composed of 12 voting members, 10 of which are independent functions while 2 are executive functions (Reed Hasting and Theadore Sarandos)[11]. The lead director of the board is an independent member. We can see that insiders own US$2.2b worth of shares in Netflix. This shows a good alignment of interests between shareholders and the board.[9] Earnest and Young is the auditor for Netflix. [10]
Institutions (78%)
Insiders (1.5%)
Individual Stakeholders (4%)
Other (16.5%)
Ownership Structure
Financial Analysis of Netflix | Rakeb Abraham
Financial Statement Analysis of Netflix Table 1 : Summary of income statement
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Number of subscribers (in mill) [12]
25.7 35.6 47.9 62.7 79.9 99 124.3 151.5 192.9 219.7
Total Revenue 3609282 4374562 5504656 6779511 8830669 11692713 15794341 20156447 24996056 29697844
Percent increase in Total Revenue 21.20% 25.83% 23.16% 30.26% 32.41% 35.08% 27.62% 24.01% 18.81%
Direct Costs 2625866 3083256 3752760 4591476 6029901 7659666 9967538 12440213 15276319 17332683
Percentage of Direct Cost 72.75% 70.48% 68.17% 67.73% 68.28% 65.51% 63.11% 61.72% 61.11% 58.36%
Earnings before tax 30480 171074 349369 141885 260507 485321 1226458 2062231 3199349 5840103
Net Income 17152 112403 266799 122641 186678 558929 1211242 1866916 2761395 5116228
In the table above important financial ratios if Netflix for the past 10 years. Some insight to the ratios shown above is given below. Total Revenue: The percentage increase in revenue shows us that the total revenue for Netflix has been increasing at a somewhat similar rate year over year. The correlation between revenue and number of subscribers shows that we can attribute the increase in revenue fully to the increase in number of subscribers (as can also be seen in the graph below). This is an indication that Netflix has been doing a good job when it comes to attracting and retaining subscribers. We can also see that the change in percentage of revenue is not as high when compared to previous years. This might be because the number of subscribers has reached a saturation point in North America. Direct cost: Direct cost is the cost that is directly associated with providing the service. We can see from the percentages and figure below that it is somewhat of a consistent amount of the revenue. This is because usually when the direct cost of the services increase, so does the price of the service.
Figure 3: Total Revenue and number of subscribers
Revenue, Cost and Net profit Per Subscriber: Like the total revenue and direct cost, the direct cost increases and decreases with an increase and decrease in revenue. The net profit per subscriber has been increasing at a higher rate since 2017.
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Financial Analysis of Netflix | Rakeb Abraham
Table 2: Revenue, Cost and Net Profit per Subscriber (2012-2021)
Years 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Revenue per subscriber 140.43899 122.881 114.9197 108.126 110.52 118.108 127.066 133.05 129.58 135.1745
Cost per subscriber 102.17377 86.6083 78.34572 73.2293 75.468 77.3704 80.1894 82.114 79.1929 78.8925
Net profit per subscriber 0.667393 3.1574 5.56992 1.956 2.336 5.6457 9.7445 12.323 14.3152 23.28734
Figure 4: Revenue, Cost and Net Profit Per Subscriber (2012-2021)
Total Revenue by Region: Netflix is now available in 190 countries across the world. The revenue Netflix makes across different regions of the world is shown in the chart below.
Figure 5: Revenue Per Region (2018-2021)
We can see that US and Canada are the highest revenue generating areas for Netflix followed by Europe, Middle East and Africa. In 2021 we can see that revenue generated in Europe, Middle East and Africa is almost as much as the revenue generated in the US and Canada. This indicates that maybe the number of subscribers in the US and Canada has reached a saturation point while subscribers in the Europe, Middle East and Africa is still increasing at a higher rate. The chart below shows the increase in number of subscribers for the years 2019-2021 in different regions of the world.
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Revenue, Cost and Net Profit Per Subscriber
Revenue per subscriber Cost per subscriber Net profit per subscriber
8.28 10.05 11.45 12.97
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Revenue Per Region ($Bn)
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Financial Analysis of Netflix | Rakeb Abraham
Figure 6: Number of Subscriber Per Region (2018-2021)
In 2021 the number of subscribers in Europe, Middle East and Africa is catching up to US and Canada. But if we compare the revenue per subscriber in each region, we can see that the US and Canada has the highest amount, that’s because Netflix charges more per customer in US and Canada than in other regions.
Figure 7: Revenue Per Subscriber per Region
Financial Ratios
Table 3: Financial Ratios of Netflix
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Current ratio 1.34 1.42 1.48 1.54 1.25 1.40 1.49 0.90 1.25 0.95
Total Debt Ratio 0.81 0.75 0.74 0.78 0.80 0.81 0.80 0.78 0.72 0.64
Total Assets turnover 0.9096 0.8082 0.7801 0.6645 0.6500 0.6150 0.6081 0.5933 0.6363 0.6661
Net Profit Margin 0.48% 2.57% 4.85% 1.81% 2.11% 4.78% 7.67% 9.26% 11.05% 17.23%
Return on Assets 0.43% 2.08% 3.78% 1.20% 1.37% 2.94% 4.66% 5.49% 7.03% 11.48%
Return on Equity 2.30% 8.43% 14.36% 5.52% 6.97% 15.60% 23.12% 24.62% 24.96% 32.28%
Earnings per share (Diluted) 0.04 0.26 0.62 0.28 0.43 1.25 2.68 4.13 6.08 11.24
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Financial Analysis of Netflix | Rakeb Abraham
1. Current Ratio: A current ratio above 1 describes a control of short-term liabilities. As can be seen
in the table above, Netflix has a good current ratio before 2019. However, Netflix shows weaker liquidity in the last 3 years, more so in 2019 and 2021. But even in those hard times the number is at least still close to 1. The decrease in the current ratio could be attributed to the decrease in total current assets for those years. Furthermore, the decrease in total current assets may in turn be due to the domestic paid subscribers Netflix lost that year as a result of the increase in price of subscription. [13]
Figure 8: 10 Year Current Ratio of Netflix
2. Total Debt Ratio: A company with a total debt ratio greater than 0.5 means that the most of the company’s assets are financed through debt as opposed to equity[14]. Netflix has a Total debt ratio that is slightly higher than 0.5, however there seems to be an effort to bring that number down for at least the past 5 years. For the year 2017 total debt ratio was 0.81 and it has come down to 0.64 in 2021.
Figure 9: 10 Year Debt Ratio of Netflix
3. Total Assets Turnover Ratio: We can see that Netflix has an average total asset turnover ratio of about 0.7 throughout the 10 years. This is an indication that Netflix has not yet turned over its assets through sales. This could be due to the high expenses that Netflix puts towards research and development in hopes of improving the company. It is projected that the total assets turnover ratio will grow to 0.95 in 2022. [15]
4. Net Profit Margin: The net profit margin shows us what percent of the revenue generated is net profit. For Netflix, we can see that the net profit margin for has been increasing year after year. Which means that the amount of profit Netflix has been getting from sales has been increasing in recent years.
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Financial Analysis of Netflix | Rakeb Abraham
5. Return on Assets and Return on Equity (ROE and ROA): Return on equity helps investors gauge how their investments are generating income, while return on assets helps investors measure how management is using its assets or resources to generate more
income. As we can see from the chart below, the return on Equity is at higher rate when compared to return on assets, which indicates that Netflix mainly takes on financial leverage to generate profit rather than assets. [16]
Figure 10: Change in ROA and ROE over the years
Analysis of companies in the same industry as Netflix
In this part of our report, we are going to see how Netflix is doing financially when compared to other companies in the same industry. The most famous competitors of Netflix are displayed in the table below.
Table 4: Netflix competitors, revenue, number of subscribers and countries[17]
Name off competitor Revenue in 2021 No of subscribers in
2021 Countries
Netflix $ 29.69 Billion 219.7 million 190
Amazon Prime Video $ 25.21 Billion 200 million 22
Youtube TV $ 19.8 Billion 3 million 65
Disney+ $ 17 Billion 116 million 53
Paramount+ $ 6.87 Billion 42 million 54
HBO Max $ 6.8 Billion 69.4 million 51
Hulu $ 3.5 Billion 42.8 million 2
Showtime $ 986 Million 28.5 million The US
Apple TV+ $ 912 Million 40 million 107
Sling TV $ 178.1 Million 2.44 million The US
We can see from the table above, we can see that for the year 2021, Netflix is leading the movie streaming
industry when considering revenue, number of subscribers and number of countries it is available in. Netflix also has the highest market share in the industry.
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Financial Analysis of Netflix | Rakeb Abraham
Financial Ratios of Competitor Companies
For the purpose of financial comparison, I have selected a few competitor companies that have the video streaming business as their main line of business and that are not involved in many other businesses. I have also used ratios of the year 2021 to compare the industries as most of these companies started streaming in recent years.
Table 5: Ratios of competitor companies
Current Ratio Total Dept ratio Total asset turnover profit margin ROE ROA
Netflix 0.95 0.64 0.66 17.23% 32.28% 11.48%
Disney+ 1.08 0.58 0.33 2.95% 2.70% 1.24%
Paramount+ 1.7 0.77 0.48 15.89% 19.45% 7.62%
HBO Max 2.1 1.13 0.35 8.20% 9.18% 3.47%
Roku 4.19 0.322 0.87 8.76% 11.84% 7.63%
Average 2.2675 0.7005 0.5075 8.95% 10.79% 4.99%
Figure 11: Financial Ratio of Netflix and Average Ratio of Competitors for 2021
1. Current Ratio: Compared to the industry Netflix has a current ratio that is lower than the average
in the year 2021. This shows that compared to other companies in the industry Netflix might have an issue controlling its current debt using current assets.
2. Total debt ratio: The total dept ratio of Netflix is at about the same level as average debt ratio of competitors. Generally, a debt ratio that is less than one indicates that a company has more assets than debt, and so Netflix has a good total debt ratio.
3. Total assets turnover: The total assets turnover of Netflix is slightly higher than the average turnover of competitors. We can say that Netflix generates sales from is assets that is slightly higher than competitors.
4. Net profit margin: The profit generated by Netflix is higher than the average net profit of competitors.
5. Return on Assets and Return on Equity (ROE and ROA): we can see from the chart above ROE and ROA is higher for Netflix when compared to the average of competitors. This is an indication that Netflix its assets and share holders’ equity well to generate profit when compared to the competitor companies.
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Ratios of Netflix and Average of Competitors
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Financial Analysis of Netflix | Rakeb Abraham
Disclaimer: The companies placed as competitors for Netflix are invested in many other services as well. Hence, the financial factors presented don’t really reflect a pure comparison amongst streaming services.
Overall Comparison of Netflix to other companies in the industry
If we look at the streaming industry, Netflix is the leading company with the highest revenue and number of subscribers. It has the highest market share in the industry. It has over 220 million subscribers worldwide and is available 190 countries. This is a large number of subscribers when compared to other companies in the industry. For example, the number of subscribers for Disney bundle, which includes Disney+, Hulu and ESPN+, together have only about 205.6 million subscribers.
Figure 12: Market Share of Streaming Companies
Taking a few companies that are publicly traded and are not involved into many other businesses for comparison, we can see that even though Netflix has the highest number of subscribers, the growth rate of Netflix is slowing down. Disney for example has shown a significant increase in number of subscribers in Q2 of 2022 when compared to Q1 2022, while Netflix has shown a slight decrease in the number of subscribers for the same time frame. If we see the percentage change in number of subscribers, from one quarter to another (given in the table below), we notice that Netflix has the lowest growth percentage.
Figure 13: Number of Subscribes (2020 Q1 – 2022 Q2) ([18],[19],[20],[21])
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Number of Subscribers for Paramount, Disney, Roku and Netflix
Paramount Disney Roku Netflix
Financial Analysis of Netflix | Rakeb Abraham
Table 6: Percentage change in number of subscribers
Q2 2020
Q3 2020
Q4 2020
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Paramount 20% 10% 7% 88% 17% 11% 20% 11% 2%
Disney 26% 81% 22% 29% 9% 12% 2% 10% 6%
Roku 8% 7% 11% 5% 3% 2% 7% 2% 3%
Netflix 6% 1% 4% 2% 1% 2% 4% 0% -1%
Figure 14: Revenue per Subscriber for Disney, Roku and Netflix ([18],[19],[20])
Risks Of Netflix
• As we can see in the above figure if we compare revenue per subscriber, we can see that Netflix
is leading the industry. Even though subscribers of competitor companies are increasing we can
see that the revenue they make per each subscriber does not come close to Netflix’s revenue per
subscriber. Even though Netflix is still the leader when it comes to the video streaming business,
the quick increase of competitor companies that offer the same service imposes a risk on Netflix
in the coming years. Netflix is also prices slightly higher when compared to its competitor
companies. Until this year, Netflix did not offer a lower-priced ad tier which gives users a cheaper
subscription option with ads, while competitors did.
Table 7 Price and Number of Movies of Netflix and competitor Companies
No Ad Price With-Ad Price movies
Netflix $ 15.49 - 5400
Amazon Prime $ 8.99 - 25000
Disney $ 7.99 - 1300
Paramount Plus $ 9.99 $ 4.99 2500
HBO Max $ 14.99 $ 9.99 2500
Hulu $ 14.99 $ 7.99 2500
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Revenue Per Subscriber for Disney, Roku and Netflix
Disney Roku Netflix
Financial Analysis of Netflix | Rakeb Abraham
As we can see in the table above Netflix charges the highest amount when compared to other
companies in the industry. It also has the highest number of movies and shows next to Amazon
Prime. But most of the shows in Amazon prime are for purchase or rent for an extra fee on top of
the membership of Amazon Prime.
• In the US and Canada large portion of the market is owned by Netflix, which is why we don’t see a significant growth in the number of subscribers for Netflix. But other competitor companies are catching up imposing a risk on the future of the company. Netflix’s global expansion might also face the risk of not being easily accepted by local users who are already customers of local streaming services. Language barrier is also another difficulty that Netflix faces in expansion.
• Another risk that Netflix faces is content. One of the main strategies that Netflix has is creating original content. Netflix allocates a huge amount of money towards creating original content. On top of that Netflix highly depends on third-party studios for licensed shows and movies, which accounts for the majority (63%) of Netflix’s viewing. More than 80% of the money meant for video content spending was allocated to original content production in 2019, and this spending is increasing year by year. Despite spending so much on content, the growth rate for the spending on original content is greater than the growth rate of subscribers. The biggest competitors of Netflix are going to be content creating companies. The flourishment of streaming companies is causing companies to compete for top resources to create original content. Moreover, they get into bidding wars for existing content. These competitions come at a hefty price. These show that Netflix has a long battle ahead in regard to content[22].
Valuation
For the valuation of Netflix, I have used a 6-year DCF model and relative valuation for deriving an intrinsic value. Each method is explained below.
Discounted Cash Flow Model (DCF)
The DCF is basically a company’s future free cash flow discounted to current value, the net present value of the free cash flows. The DCF model is forecasted for 6 years (including 2022). Important predictions in the DCF model are presented below:
Total Revenue: The percentage change in total revenue is expected to slightly decrease year to year. This is because Netflix has subscribers as its major generator of revenue. In recent years it seems like Netflix has reached a saturation level as it is not seeing a significant increase in number of subscribers or revenue when compared to previous years. The percentage increase from 2020 to 2021 was 18%. In recent announcements from Netflix, they have mentioned that they have lost around 200,000 subscribers in the beginning of 2022.[8] But Netflix also made an announcement stating that they plan on introducing a lower priced ad-tier in 2023 which is expected to increase the number of subscribers by drive around $600 million in revenue from advertising. [23] Taking the above-mentioned points in to consideration, the expected growth in revenue is presented in the table below.
Table 8: Expected growth in Revenue
2019 2020 2021 2022 2023 2024 2025 2026 2027
Total Revenue 28% 24% 18% 13% 16% 16% 16% 16% 16%
Financial Analysis of Netflix | Rakeb Abraham
Weighted Average Cost of Capital: The WACC is a company’s average after tax cost of capital from all sources, it is the average rate a company expects to pay to finance its assets. The WACC is also used as a discount rate to calculate future cash flows. WACC is calculated by multiplying the percentage of market capital that is debt by cost of debt after tax and the percentage of market capital that is equity by cost of equity and summing up the products.
To estimate cost of debt, I have used the interest for the past 10 years and the respective long- term debt and used the average of the 10 years. The cost of equity is an opportunity cost of capital. It is the rate of return shareholders require in order to compensate them for the risk of investing in the stock. The cost of equity is calculated using the CAPM. The Beta in the CAPM model measures the change in the risk of the stock with a one-point increase in the market risk premium. Beta was calculated by running a simple linear regression on the historical data of Netflix and S&P 500 (as the market risk premium).
Table 9: Cost of Debt and Cost of Equity
The WACC calculated using the above values is 10.63%. The intrinsic value of Netflix using DCF model was found to be $244.
Relative Valuation
The second method used for deriving the intrinsic value on Netflix is relative valuation. Relative valuation model is a way of finding a company’s value by comparing it to publicly traded companies in the same business, how it is priced relative to its competitors. The companies used for the relative valuation of Netflix are Comcast, Disney, Paramount, Roku and Warner Bros inc. To find the relative intrinsic value of Netflix I used average of the P/E ratio (how much investors are willing to pay for $1 of company earnings of each company), EBITDA multiplies (Market cap/ EBITDA of each company), sales multiplier (Market cap/Sales for each company) and book value multiplier (Market cap/Book Value for each company). The higher these values are the higher the expectations for growth.
Table 10: P/E ratio, EBITDA Multiplier, Sales Multiplier and Book Value Multiplier for Netflix comparable companies
Company P/E Ratio EBITDA Multiplier
Sales Multiplier
Book Value Multiplier
Netflix 52.28 42.35 9.01 16.88
Comcast 15.70 10.08 1.91 2.31
Disney 138.28 51.01 4.09 3.12
Paramount 4.16 5.10 0.66 0.84
Roku 127.23 118.49 11.15 11.15
Warner bros Discovery 11.84 6.25 0.98 1.03
Average 58.25 38.88 4.63 5.89
Cost of Equity 2022-2026
Risk Free Rate 3.38%
Adjusted Beta 1.45
Market Risk Premium 5.70%
Cost of Equity 11.95%
Cost of Debt 2022-2026
Sum of interest (Past 5 years) 3014495
Sum of Long-Term Debt (Past 5 years) 62120917
Cost of Debt 4.80%
Financial Analysis of Netflix | Rakeb Abraham
The P/E ratio is calculated by dividing the Market Cap by the Net income for 2021. Similarly, I calculated the P/E ratio for each competitor based on their market cap and net income. I then calculate the average of the industry ratios including Netflix. The P/E ratio for Netflix is 52.28, which is close to the industry’s average, and it shows that Netflix is trading at 52 times its earnings.
EBITDA multiplier provides a normalized ratio for differences in capital structure, taxation, fixed assets, and for comparing disparities of operations between different companies.[24] We can see that Netflix has an EBITDA multiplier that is higher than the industry average of 38.88.
Sales Multiplier this ratio enables the investors to gauge the value of the company based on its sales. It is calculated by dividing the market cap by the total sales of the company. Netflix has a sales multiplier of 9.01 which is higher than the industry average.
Book value multiplier this ratio compares a firm's market capitalization to its book value by dividing the company's market cap by its book value. This ratio gives an indication of the value that the market gives to your company compared to its book value. Book value is a value that represents what will remain if the company liquidates all its assets and pays off all its debt. We find that Netflix has a book value multiplier of 16.88 which is much higher than the industry value of 5.89.
Table 11: Price per share using each ratio
Cap Based on AVG Price per share
P/E (forward or last earnings) $ 297,997,798.48 $ 670.00
EBITDA multiplier $ 245,569,262.32 $ 552.12
Sales multiplier $ 137,598,649.25 $ 309.37
Book Value multiplier $ 93,298,396.83 $ 209.77
Taking the average of the price per share calculated using the above-mentioned ratios, the value of Netflix is computed to be $435.31.
Monte Carlo Simulation
Monte Carlo Simulation model runs a simulation on the stock returns to determine the future stock price based on its historic performance. For Netflix, I used the 5 year daily historical return data to simulate the price a year from today. After finding the simulated stock price, several iterations were performed on the price to find potential range of what the stock price could be.
Figure 15 Distribution of Monte Carlo Simulated Values
Mean 282.1157
SD 133.9272
10% Worst 141.914
10% Best 441.9299
Financial Analysis of Netflix | Rakeb Abraham
Target Price
For the calculation of the intrinsic value of Netflix, it appears that the DCF model is a better representation of projected value the relative valuation for the following reasons:
• The DCF is detailed and takes in to account the current state and expected change in revenue for Netflix.
• The companies used as comparable for Netflix do not have streaming service as their main course of business. Therefore, the comparison might not be an exact representation.
Due to the above stated points, I have used 90% of the projected value from DCF and 10% of the value predicted from relative valuation to calculate the target price.
Target Price = 90% (245.24) + 10% (435.31)
Target Price = $264.24
Conclusion
The target value we found is $264.24, the current value of Netflix is $214.29 which is a 23% upside. This shows that the current value of Netflix is slightly undervalued, I recommend a Hold on the stock of Netflix for now. Even though Netflix lost 970,000 global paid subscribers in the second quarter of 2022, it has plans that could help gain back customers and increase revenue.[25]
• The introduction of the lower priced ad-tier is expected to bring in revenue from subscribers as well as ads.
• Netflix plans on cracking down password sharing which is expected to bring in more subscribers and more Revenue. Netflix estimates that over 100 million households are freeloading off the video-streaming service through password sharing, including over 30 million households in the US and Canada. [26]
• Netflix is working on creating original content which will help in attracting and retaining subscribers.
• Netflix is expanding its international market by including shows and movies that the international market might relate with.
For investors that have already invested in the stock of Netflix it is worth keeping the stock they already have and see how the strategies Netflix has for coming years help in increasing the value of Netflix.
Financial Analysis of Netflix | Rakeb Abraham
References
[1] “It’s official: Netflix ad-supported tier will cost $6.99 and launch next month.” https://finance.yahoo.com/news/netflix-ad-supported-tier-launch-171131672.html (accessed Oct. 14, 2022).
[2] “Netflix | Founders, History, Shows, & Facts | Britannica.” https://www.britannica.com/topic/Netflix-Inc (accessed Aug. 26, 2022).
[3] “NETFLIX, INC. : Shareholders Board Members Managers and Company Profile | US64110L1061 | MarketScreener.” https://www.marketscreener.com/quote/stock/NETFLIX-INC- 44292425/company/ (accessed Aug. 28, 2022).
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[9] “Here’s What Netflix, Inc.’s (NASDAQ:NFLX) Shareholder Ownership Structure Looks Like.” https://www.yahoo.com/now/heres-netflix-inc-nasdaq-nflx-233509012.html (accessed Aug. 28, 2022).
[10] “Mergent Online - Company Detail : Netflix Inc.” https://www.mergentonline.com/companydetail.php?compnumber=105639&pagetype=synopsi s (accessed Aug. 26, 2022).
[11] “NETFLIX INC — Ethics & Boards.” https://www.ethicsandboards.com/companies/28407-netflix (accessed Sep. 15, 2022).
[12] “Netflix Subscribers 2022 — How Many Subscribers Does Netflix Have?” https://www.demandsage.com/netflix-subscribers/ (accessed Sep. 04, 2022).
[13] “Netflix reports first net subscriber loss in the US, misses global subscriber growth predictions | TechCrunch.” https://techcrunch.com/2019/07/17/netflix-reports-first-net-subscriber-loss-in- the-u-s-misses-global-subscriber-growth-predictions/ (accessed Sep. 04, 2022).
[14] “Debt ratio - Wikipedia.” https://en.m.wikipedia.org/wiki/Debt_ratio (accessed Sep. 04, 2022).
[15] “Netflix Asset Turnover from 2010 to 2022 | NASDAQ:NFLX.” https://www.macroaxis.com/invest/ratioPatterns/NFLX/Asset-Turnover (accessed Sep. 04, 2022).
Financial Analysis of Netflix | Rakeb Abraham
[16] “Return on Equity (ROE) vs. Return on Assets (ROA): What’s the Difference?” https://www.investopedia.com/ask/answers/070914/what-are-main-differences-between- return-equity-roe-and-return-assets-roa.asp (accessed Sep. 04, 2022).
[17] “The 10 Biggest Netflix Competitors | Feedough.” https://www.feedough.com/the-10-biggest- netflix-competitors/ (accessed Sep. 11, 2022).
[18] “Mergent Online - As Reported : Roku Inc.” https://www.mergentonline.com/companyfinancials.php?compnumber=144481 (accessed Sep. 18, 2022).
[19] “Disney Plus Revenue and Usage Statistics (2022) - Business of Apps.” https://www.businessofapps.com/data/disney-plus-statistics/ (accessed Sep. 18, 2022).
[20] “Netflix Revenue and Usage Statistics (2022) - Business of Apps.” https://www.businessofapps.com/data/netflix-statistics/ (accessed Sep. 18, 2022).
[21] “• Global Paramount subscriber number 2022 | Statista.” https://www.statista.com/statistics/1047393/cbs-all-access-subscribers-us/ (accessed Sep. 18, 2022).
[22] “5 Strategic Risks For Netflix: From Competition to Regulation.” https://journo.com.tr/netflix- strategic-risks (accessed Sep. 17, 2022).
[23] “Netflix may haul in billions of dollars by selling ads, predicts JPMorgan.” https://finance.yahoo.com/news/netflix-may-haul-in-billions-of-dollars-by-selling-ads-predicts- jp-morgan-094339704.html (accessed Oct. 16, 2022).
[24] “EBITDA Multiple - Formula, Calculator, and Use in Valuation.” https://corporatefinanceinstitute.com/resources/knowledge/valuation/ebitda-multiple/ (accessed Oct. 16, 2022).
[25] “Netflix Lost 970,000 Subscribers in Q2 | IndieWire.” https://www.indiewire.com/2022/07/netflix-q2-earnings-subscriber-loss-1234741639/ (accessed Oct. 16, 2022).
[26] “Netflix: Over 100 Million Households Are Freeloading Via Password Sharing | PCMag.” https://www.pcmag.com/news/netflix-over-100-million-households-are-freeloading-via- password-sharing (accessed Oct. 16, 2022).