RICARDO PALMA UNIVERSITY

FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION

GLOBAL BUSINESS ADMINISTRATION SCHOOL

FINANCIAL ANALYSIS OF NETFLIX

By

FRANCESCA

DIANA

JIM

2018 – I

1
 INDEX

RESUMEN 4

ABSTRACT 4

MATERIAL AND METHODS 5

INTRODUCTION 5

Theoretical Framework 6

General objectives 7

Specific objectives 7

Netflix Share Price Trend 8

RESULTS 12

History 12

Company Overview 12

Ratios 12

Liquidity Ratio 13

Solvency Ratios 14

Ratios of Management 16

Profitability Ratios 17

Sources and Uses 18

Weighted Average Cost of Capital (WACC) 20

Capital Asset Pricing Model (CAPM) 21

Net Operating Profit after Taxes (NOPAT) 22

Capital 22

Net Investment 23

Free Cash Flow (FCFF) 23

2
 Discount Factor 24

Present Value of Free Cash Flow 24

Long – Term Financial 24

Required External Financing 24

New Investment 25

Required External Financing 25

Internal Growth Rate _ 25

IGR 25

Sustainable Growth Rate 25

Return on Equity (ROE) 26

Merger and Acquisition 27

Acquisitions: Netflix and Millarworld Comics 27

Merger: Between Apple and Netflix. 27

DISCUSSION 27

CONCLUSIONS 28

REFERENCES 29

ANNEXES 30

Annex 1: Cash Flow of Netflix 30

Annex 2: Income Statement of Netflix 31

Annex 3: Balance Sheet of Netflix 32

Annex 4: Excel link 33

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 ANÁLISIS FINANCIERO DE NETFLIX
FINANCIAL ANALYSIS OF NETFLIX

Francesca Rodríguez Beltrán, Diana Silva Cayupe, Jim Saldaña Ojeda

Students of the Ricardo Palma University - Faculty of Economic and Business Sciences

Professional School of Global Business Administration

RESUMEN

Este trabajo tiene como finalidad analizar la situación financiera, considerando los últimos
cuatro periodos anuales de Netflix, una empresa que proporciona mediante tarifa plana
mensual un streaming de contenido multimedia, como películas, series de televisión y
documentales. Netflix, caracterizada por una propuesta de valor innovadora, ha
revolucionado al mundo del entretenimiento por internet, formando actualmente parte del
ranking en Fortune 500, encontramos a Netflix en el puesto 261, 53 puestos más adelante
comparado con el año anterior. Aplicando lo aprendido en clase, del libro Fundamentals of
Corporate Finance de Brealey, Myers and Marcus, Analizaremos financieramente a Netflix,
por ejemplo, se analiza la rentabilidad de la empresa, los ratios, el WACC, sources and
uses, planes a corto y largo plazo, entre otros más importantes.

Palabras clave: Análisis Financiero, Netflixs, propuesta de valor, rentabilidad, Wacc,

corto plazo, largo plazo.

ABSTRACT

The purpose of this work is to analyze the financial situation, considering the last four
annual periods of Netflix, a company that provides monthly flat rate streaming of
multimedia content, such as movies, television series and documentaries. Netflix,
characterized by a proposal of innovative value, has revolutionized the world of online
entertainment, currently part of the Fortune 500 ranking, Netflix was ranked 261, 53 place
later compared to the previous year. Applying what has been learned in class, from
Brealey's Fundamentals of Corporate Finance, Myers and Marcus, we will analyze Netflix
financially, for example, we analyze the profitability of the company, the ratios, the
WACC, sources and uses, short and long-term plans term, among others more important.

Key words: Análisis Financiero, Netflixs, propuesta de valor, rentabilidad, Wacc, corto
plazo, largo plazo.

4
MATERIAL AND METHODS

For the realization of these work different sources of information will be used, such as
these, obtained from digital thesis repositories, financial analysis documents for Fortune
500 or Nasdaq, information extracted from intelligence portals, document information from
previous studies and public reports, financial statements provided by the same company
and Financial Analysis provided by the same company. For the elaboration of this work,
the results statements will be studied, analyzed and analyzed using different exercises and
methods.

INTRODUCTION

Netflix today is one of the most popular and significant platforms for video streaming
worldwide, providing its clients with a wide range of audiovisual products for a monthly or
annual payment (subscription) and necessarily an internet connection that can be viewed by
different digital platforms. Worldwide Netflix has more than 120 million subscribers are
expanded in the US, Canada, much of South America making it today in the company with
the highest audiovisual content worldwide.

In the economic area Netflix has accumulated revenues of more than 558,929 million
dollars in 2017, it should be noted that in its beginnings the company only provided the
service of renting movies that were sent through the mail (mailbox) of each client , but
recognizing that the internet was a tool that was bringing new markets and customers
wanted to innovate and decided to enter streaming through VoD, is how they change the
direction of mailings to monthly subscription.

In this case the client had a great advantage that it was not going to be delayed, because
this generated paying some penalties for delay and that the rental of movies, series or
documentaries would be unlimited.

In addition to commenting that the various programs that are displayed are television
series that broadcast are broadcast as completed and now that it has its own movies or
series of Netflix production as well as the most popular cinemas or with the largest
audience tending to new subscribers and the savings they make to being through streaming
and non-physical makes this economically more viable for the final consumer who do not
have greater purchasing power unlike other competitors.

Another important point is that this platform sends you recommendations according to
the content you have visualized and if you wish you can rate the contents and this gives as a
reference that end users can have access to contents of similar contents and ratings
according to their personal tastes raising the quality of service and experience.

5
 This compared to cable TV is that even if we enjoy movies or series we are tied to
advertising and we lose concentration or interest in some way and I can pause to continue
in case I have some other task to do.

Netflix has agreements with major American producers: Disney, Pixar, Marvel since
2016 reinforcing and attracting more customers who are followers of their most successful
productions and being exclusive for the time being in the US and we will know that these
will be expanded later.

Theoretical Framework

Today we live in a digital world and every day we are delving deeper into the
cyberspace that is dominated by computer networks and is essential for all people,
businesses, schools, universities and others.

Currently, we live in the fourth industrial revolution, where the concepts of collaborative
economy, disruptive technologies, disruptive companies, business networks and
autonomous work are those that govern labor relations. (Schwab, 2016)

The digital revolution is an avalanche of changes coming from the Internet, geolocation,
robotization, artificial intelligence and the Internet of things, which are changing forever
our way of relating, buying, doing business, living our daily lives1 .

These changes are irreversible, deep and global Developed countries such as the United
States reach almost 90% of Internet penetration among its inhabitants, for a global average
of almost 50%, of about 3,731,973,423 users in total. This means that today the urban
population of the whole world learns almost instantaneously of anything. An unprecedented
access to global connectivity.

Streaming is a term that refers to the fact of listening to music or watching videos
without having to download them completely before you hear them or see them. This is
achieved by fragments sent sequentially through the network (such as the Internet). It is
used in the Internet medium to refer to streaming media, which is the complete term for the
transmission of video or audio. When the broadcast is live, it is known as live streaming2.

Also comment that the users who use technology the most are millennials and
centenials, and then we will show what the characteristics of each of them are.

1
Taken from https://es.findasense.com/ideas-tecnologia/la-evolucion-del-consumidor-en-el-mundo-del-
internet-de-las-cosas/
2
Taken from https://www.aboutespanol.com/que-es-streaming-157642
6
The Millennials (born between 1988 - 20003)

 They consume 84% of entertainment content and 72% of technology content (study
on Internet use by different generations of BuzzStream - Fractl 2015).
 73% of this generation watches videos through the internet (Digital Trends 2016
study).
 60% listen to streaming music (2016 Digital Trends study).
 33% watch streaming TV series (Digital Trends 2016 study).

The Centennials (2000-present4)

For this generation, the Internet is the fastest way to get knowledge, fun and friends.
They represent 32% of the world's population (notes the New Kids On The Block study
Millennials & Centennials Primer of the Bank of America Merrill Lynch). They prefer to
use smartphones to access the network.

 They see their cell phone an average of 150 times a day and are able to send 6,000
million emoticons and 50,000 instant messaging messages daily (according to e-
Marketer).
 Children get their first cell phone at approximately 10 years old (according to e-
Marketer)

General objectives:

 Consult the company Netflix

 Analyze and interpret the Financial Statements of the Netflix company in the periods
from 2014 to 2017 with the purpose of applying the knowledge acquired in the course
of the subject Financial Administration II
 Check the trends of the sector where Netflix is located

Specific objectives:

 See the companies ranking

 See your competitors
 Verify the Financial Statement
 Analyze ratios
 Calculate WACC
 Calculate Sources and Uses
 Give a diagnosis according to the results obtained for the solution of problems
encountered.

3
Taken from https://tendenciasdigitales.com/las-generaciones-y-su-uso-de-internet/
4
Taken from https://tendenciasdigitales.com/las-generaciones-y-su-uso-de-internet/
7
Netflix Share Price Trend

Today we are living the fourth revolution that is the technological and therefore the
companies that satisfy customers quickly, news, accessibility and diversity may acquire
new customers as well as the permanence of existing ones.

That said the trend of Netflix will continue to rise, as most of its consumers are
millennials and they are used to working with cutting-edge technology, which implies
consumption on various platforms such as cell phones, smart TV, laptops, tablets, among
others. and the price is more accessible in front of its competition that are HBO, FOX,
Amazon Prime, Hulu among others.

This upward trend has been continuous since 2012, having its highest peak in June 2018
with 417.30 compared to June 2017 with a value of 149.41, having grown 279.30% and
663.01% compared to June 2014 on which had a price of 62.94, also indicate that they have
raised prices in 2017 but this has not been affected as when prices rose in 2011 up to 60%.

The abrupt price increase in 2011 triggered an exodus that cost Netflix more than
800,000 subscribers and caused its shares to lose 80% of their value in a tumultuous 13-
month period. The experience taught Netflix to reward existing subscribers, since the high
prices will be applied gradually to new customers. (The universe, 2015)

It should be noted that Netflix is hiring major directors for the creation of their own
series and movies such as the influential creator Ryan Murphy, author of Glee and
American horror story with a sum of 300 million dollars that began operations from the
month of June. The contract stipulates that Murphy as of June 1 will only create new
projects for the content platform and for 5 years. "Ryan Murphy's series has influenced the
global cultural story, they have reinvented genres and changed the direction of television
history", explained Ted Sarandos, Netflix's content manager, announcing this exceptional
signing in statements collected by Deadline.

This signing is the second stab that Netflix has hit conventional television and Disney in
recent months. The previous one was the one of Shonda Rhimes, the creator of series like
Anatomy of Gray and Scandal, that signed another millionaire contract (in that case valued
above 100 million) and that now is working in new series for the platform. (The vanguard,

8
2018).

Source: Statista

Source: Forrester

9
Source: Company Reports, Janney Capital Markets

Source: Statista

10
Source: Forrester

11
RESULTS

History

Netflix emerged in 1997 in California, United States. It was created by Reed Hastings
and Marc Randolph as a video store with a video platform via online or by mail (service
available only to the United States), which provides the subscriber with an unlimited
amount of rents from the films and series in its catalog.

Marc Randolph, relates that the idea arose based on the desire to start an e-commerce
business. At first, Netflix was a virtual video store whose clients chose movies through an
online platform and these were delivered through postal mail.

Company Overview

Netflix is a media transmission service located in California, USA. UU In recent years it

has become a leading transmission service. For a monthly subscription fee, Netflix offers
more than 125 million hours of movies, TV shows and documentaries to watch using a
device connected to the internet. Netflix launched its broadcast service in 2007 and has
established itself at the forefront of content transmission services in national and
international markets.

Netflix is the leading Internet entertainment service in the world. Present in more than
190 countries, its 125 million subscribers enjoy series, documentaries and feature films
from a wide variety of genres and in various languages. Netflix subscribers can watch the
series and movies they want, whenever they want, where they want, and on any screen
connected to the Internet. They can also play, pause or continue enjoying, and all without
announcements or commitments of permanence.

Netflix exceeded 100 million total subscribers in the second quarter of 2017 and
continues to expand internationally at fast rates. This meteoric rise has positioned Netflix as
the industry leader in media transmission services around the world. The main objectives of
Netflix are to strengthen its original Netflix content offer, increase its subscriber base
internationally and nationally, and defend against the competition.

Ratios

To begin with Netflix's financial analysis, we will find the financial ratios, also known
as index or indicators, which are already one of the main tools for analyzing the financial,
economic, and commercial situation.

But, why do we find the financial ratios? The answer is simple: The evaluation of the
ratios is of special interest not only for Netflix administrators, but also for shareholders and

12
potential investors, as well as for financial institutions. That, based on them, they will
decide about their credit policy towards the company.

Liquidity Ratio

We will find and analyze the liquidity ratios, since these will measure Netflix’s liquid
resources availability to face its short-term obligations. Within the group of liquidity ratios,
we will find the general liquidity index, the acid test index and the working capital ratio.
We will find the ratios using the Income Statement and the Balance sheet, which are in
Annex 2 and 3 respectively.

RATIO FORMULA 2017 2016 2015 2014

GENERAL Total Current Assets / Total
1.403 1.247 1.539 1.475
LIQUIDITY Current Liabilities

This ratio expresses the ability of Netflix to cover its most urgent or short-term
obligations with the most liquid assets available. If the ratio is higher, the company's
possibilities of facing its current commitments are greater.

1> Good payment capacity

1= It barely covers the payments
1< Poor payment capacity

This means that Netflix has a good payment capacity in all the annual periods analyzed,
in order to comply with its short-term obligations.

In 2017 it means that for every 1 USD of debt, Netflix has a payment capacity of 1.40
USD this low ratio in 2016, but in 2015 this ratio reached its highest value, meaning that in
2015 Netflix had a payment capacity greater than the year 2017.

RATIO FORMULA 2017 2016 2015 2014

ACID TEST (QUICK (Current Assets - Inventory)
1.403 1.247 1.539 1.475
RATIO) / Current Liabilities

Like the liquidity ratio, this ratio examines short-term payment capacity, but it does so in
a more demanding manner, since it assesses liquidity with assets that are more easily
convertible into money.

We see that Netflix’s payment capacity is good in the 4 years, already grown in 2017 as
opposed to 2016, but it is low in comparison with the years 2015 and 2014, this means that
in the year 2015 Netflix, for every 1 USD of debt, had a capacity to pay 1,539 USD higher
than the year 2017 which, for every 1 USD of debt, has a payment capacity of 1,403 USD.

RATIO FORMULA 2017 2016 2015 2014

WORKING Current assets - Current
$ 2,203,662 $ 1,133,634 $ 1,902,216 $ 1,263,899
CAPITAL liabilities
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 WC indicates the net availability of resources available to the company to operate in the
short term, after fulfilling its current obligations.

Analyzing this ratio, means that Netflix can operate efficiently by having its own
resources with which it has, to operate in the short term, after fulfilling its current
obligations, and as we see working capital is increasing in a good manner according to
advancing years, from 1,263,899 USD in 2014, working capital increased to 2,203,662
USD in the year 2017.

Solvency Ratios

These ratios will measure Netflix's debt capacity, that is, its ability to meet both current
and non-current obligations, taking into account its asset and asset endowment.

They are of special interest to current and potential creditors, who, when assessing the
degree of indebtedness, can determine the probability that the credits granted will be
conveniently reimbursed.

1> Poor payment capacity

1= It barely covers the installment payments
1< Good payment capacity

RATIO FORMULA 2017 2016 2015 2014

Patrimonial
Total Liability / Total Equity 4.308 4.070 3.589 2.791
Indebtedness

This ratio reveals the degree of autonomy or financial dependence of the company. It is
desirable that it be low, since this means that there is a low degree of indebtedness and,
therefore, a good capacity to pay creditors and suppliers.

1> Poor payment capacity

1= It barely covers the installment payments
1< Good payment capacity

As we can see, in all the years analyzed, Netflix depends mostly on financial institutions,
that is, it has a somewhat significant degree of indebtedness, which has increased
progressively and significantly over the years.

RATIO FORMULA 2017 2016 2015 2014

Long Term Patrimonial
Indebtedness
Long Term Liability / Equity 2.782 2.358 2.001 1.357

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 As with the previous ratio, this measures the importance of debts or external financing
against own financing (equity).

However, it deducts from debts those of an immediate nature, concentrating exclusively

on long-term ones. It provides a panoramic view of the structural or long-term solvency of
the company.

These results mean that Netflix depends mostly on financial institutions, that is, it has a
significant degree of indebtedness and this has been progressively increased, as we can see
in 2014 Netflix has a degree of indebtedness (Liability) of 134% and in 2017 it has a debt
level of 278%, this is due to the fact that Netflix's long-term debt has increased
considerably since the 2014 period with 2,521,638 USD in debt to 9,964,474 USD in the
long term.

RATIO FORMULA 2017 2016 2015 2014

Indebtedness of Total Liabilities / Total
0.812 0.803 0.782 0.736
Total Assets Assets

This ratio evaluates what percentage of total assets is financed by third parties.

Therefore, we can see that in 2017, 81% of Netflix’s total assets are financial by third
parties, this has been progressively increased over the years, since in 2015 the financing is
lower and in 2014, much lower, a financing of 74%, 7% less, this because Netflix's total
liabilities have increased significantly from 5,184,792 USD in 2014 to 15,430,786 USD in
2015. This data can be found in the Balance Sheet.

RATIO FORMULA 2017 2016 2015 2014

Long Term Debt of Long Term Liability / Net
31.197 25.241 25.660 16.825
Net Fixed Assets Fixed Assets

This ratio analyzes the way in which fixed assets are financed (real estate, machinery
and equipment).

We can appreciate that in all the years, especially in the 2017 period, the financing of
fixed assets is mainly financed with higher long-term debt, and this financing has been
increased with great force in the last 4 years.

RATIO FORMULA 2017 2016 2015 2014

Leverage Total Assets / Equity 5.308 5.070 4.589 3.791

This ratio expresses the ability of Netflix to "leverage" and multiply the potential of its
own resources, using third-party funds.

The result is greater than 1 in all the years, so it is interesting for Netflix borrow to
increase the amount of the investment, since the more assets can be financed from the
15
existing equity, the higher the leverage, as it is being used, for own benefit a greater amount
of external capital, this ratio has been increased to its benefit progressively during the
periods, started in 2014 with 3.79 and in 2017 it ended with a 5.308.

RATIO FORMULA 2017 2016 2015 2014

Endorsement of
Net Fixed Assets / Equity 0.089 0.093 0.078 0.081
Indebtedness

This ratio indicates the degree to which the company manages to leverage or multiply
the power of its assets to finance, through third-party resources, its fixed or long-term
assets. While it is true that this time in 2014 was 8% and in 2017 9% increased little, but
increased, since both equity and net fixed assets increased simultaneously and progressively

Ratios of Management

We will find the management ratios, since they evaluate the efficiency with which assets
are managed and managed, in such a way that this is reflected in higher sales volume.

RATIO FORMULA 2017 2016 2015 2014

Rotation of Cash Cash and Cash Equivalents x
86.909 59.829 96.078 72.829
and Banks 360 / Sales

For this case, Netflix has increased the number of days it can support without making
any sales, in the years this number of days has increased comparing the year 2014 with the
2017 has increased 14 days, but if we compare the year 2015 with the 2017, the number of
days that Netflix would support without any low sale in 10 days, this despite the fact that
both sales and assets have increased simultaneously, progressively and constantly.

RATIO FORMULA 2017 2016 2015 2014

Asset Rotation Net Sales / Total Assets 0.615 0.650 0.664 0.782

This ratio measures the efficiency with which Netflix assets are used to generate sales. A
high ratio reflects a high productivity of the assets as sales generators.

The productivity with which sales were made using Netflix assets are good but have
decreased progressively compared to 2014, where it reached its highest rank, productivity
was 78% and from there it was gradually decreasing in 2015 with 66 % and in 2017 with
61%.

RATIO FORMULA 2017 2016 2015 2014

Cost of Sales to
Cost of Sales / Total Sales 0.655 0.683 0.677 0.682
Sales

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 This ratio reflects the impact on each Netflix account sold. It is an index of the
productive efficiency of the company. The higher the ratio, the greater the proportion of
sales diluted absorbed by costs, and therefore, the lower the gross profit margin.

In the year 2017 we have a ratio of 0.655 the lowest ratio compared to the other periods,
this means that the profit margin has been increased in the last periods as sales have
increased and have also increased along with them the profit margin , compared to the year
2016 where sales are greater than profit but profit and margins are less than all the analyzed
periods.

RATIO FORMULA 2017 2016 2015 2014

Rotation of Fixed
Net Sales / Net Fixed Assets 36.608 35.267 39.095 36.728
Assets

This ratio measures the capacity of the assets to generate sales, this ratio can also be
interpreted as the number of times that the fixed asset could be renewed with the sales
generated in a certain period.

As we can see the highest turnover was in 2015 with 39,095 means a more efficient or
productive use of fixed assets, compared to the year 35,267. On the other hand, in 2017 the
ratio was 36,608 which mean that Netflix can renew its fixed assets 36,608 times with the
sales that I generated in that same period.

Profitability Ratios

The profitability ratios measure the performance of the company in terms of obtaining
benefits on the investment, that is, the rate of return on investment.

RATIO FORMULA 2017 2016 2015 2014

Profitability Ratios Net Income / Equity 0.156 0.070 0.055 0.144

The profitability ratios measure the performance of the company in terms of obtaining
benefits on the investment, that is, the rate of return on investment.

Analyzing we see that the year 2017 was the best, for every 1 USD invested, investors
would get a 16% compensation, in 2015 for every 1 USD invested, investors would get a
5% compensation, but in 2014, for every 1 USD invested, investors would get a 14%
payback how we can see the best year was 2017 followed by 2014 and finally the 2015.

RATIO FORMULA 2017 2016 2015 2014

Gross Profit Gross Profit / Sales 0.345 0.317 0.323 0.318

This ratio evaluates the profitability of sales versus cost of sales

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 In 2017 Netflix's ability to cover its operating expenses and obtain profits before interest
and taxes was 34%, this ratio is higher than all of the other periods, which were also good
with a 32% solvency to cover their expenses.

RATIO FORMULA 2017 2016 2015 2014

Profitability of the
Net Income / Total Assets 0.029 0.014 0.012 0.038
Assets

This ratio indicates the degree of profitability of the assets, whether monetary or non-
monetary. It reflects the efficiency with which they are used, measured through their
contribution to the net profit of the company.

As we can see the data are positive but could be better, these "low" ratios could be due
to the existence of a high idle installed capacity or a poor management of liquidity. These
ratios are lower in 2015 and 2016 with a 1% return on assets.

Sources and Uses

One of the questions asked by any manager is: where did the money come from and
what was spent? How is the firm financed?

Well, for Netflix these questions are not unrelated to reality, and these questions are not
only the CEO of Netflix, but also the banks that lend to the company, these questions can
be answered with the State of Sources and Uses.

With this report we have tried to determine where the money came from (sources) and
how it was spent (uses). It is about identifying which items of the Balance Sheet increase or
decrease the availability of cash.

For this reason, we have calculated finding the differences of the items of the

General Balance between the last two periods 2017 and 2016 (we subtract the accounts
for the year 2017 with the previous year) and depends on the result we will determine if the
account works as a source or a use of funds.

We can appreciate that the accounts that increased for their use were the Cash and Cash
Equivalent and the current active total, due to the fact that short-term investments were
used as a source.

If an asset is increased, this occurs because an asset is decreased, a liability is increased,

the equity is increased or an appropriate combination of them.

In this case, funding was made primarily from Accounts Payable, Other Current
Liabilities, Long-Term Debt and Other Liabilities, and was used to increase, acquire and

18
improve fixed costs, other assets and of course the Intangible Assets . This information is
very useful for bank managers, who are interested in verifying that the company maintains
an adequate level of working capital and that the money they lend to the firm is used in the
agreed manner.

Source Uses
Assets Negative Positive
Liabilities Positive Negative
Equity Positive Negative

BALANCE SHEET Period 2016 - 2017

Period Ending: 12/31/2017 12/31/2016 Sources Uses
Current Assets
Cash and Cash Equivalents $ 2,822,795 $ 1,467,576 $ 1,355,219
Short-Term Investments $ - $ 266,206 $ -266,206
Net Receivables $ - $ - $ -
Inventory $ - $ - $ -
Other Current Assets $ 4,847,179 $ 3,986,509 $ 860,670
Total Current Assets $ 7,669,974 $ 5,720,291
Long-Term Assets
Long-Term Investments $ - $ - $ -
Fixed Assets $ 319,404 $ 250,395 $ 69,009
Goodwill $ - $ - $ -
Intangible Assets $ 10,371,055 $ 7,274,501 $ 3,096,554
Other Assets $ 652,309 $ 341,423 $ 310,886
Deferred Asset Charges $ - $ - $ -
Total Assets $ 19,012,742 $ 13,586,610
Current Liabilities
Accounts Payable $ 674,649 $ 510,474 $ 164,175
Short-Term Debt / Current $ -
$ -
Portion of Long-Term Debt $ -
Other Current Liabilities $ 4,791,663 $ 4,076,183 $ 715,480
Total Current Liabilities $ 5,466,312 $ 4,586,657
Long-Term Debt $ 6,499,432 $ 3,364,311 $ 3,135,121
Other Liabilities $ 3,465,042 $ 2,955,842 $ 509,200
Deferred Liability Charges $ - $ - $ -
Misc. Stocks $ - $ - $ -
Minority Interest $ - $ - $ -
Total Liabilities $ 15,430,786 $ 10,906,810
Stock Holders Equity
Common Stocks $ 1,871,396 $ 1,599,762 $ 271,634
Capital Surplus $ - $ - $ -
Retained Earnings $ 1,731,117 $ 1,128,603 $ 602,514
Treasury Stock $ - $ - $ -
Other Equity $ -20,557 $ -48,565 $ 28,008
Total Equity $ 3,581,956 $ 2,679,800
Total Liabilities & Equity $ 19,012,742 $ 13,586,610
$ 5,692,338 $ 5,692,338

Netflix had a major calculation error. This company predicted to obtain many more
subscribers worldwide than it finally obtained.

19
 An example of this was last year 2017, in June. Netflix expected to get close to 2.5
million subscribers, but, nevertheless, it only obtained 1.7 million. In that same year, it also
obtained a decrease in subscribers in the months of April and June.

These losses may have been due to the increase in the price announced that Netflix
would perform on its services. The clients, before this news, decided to cancel their
subscription, before Netflix increased its monthly price. This fact led to the company's
shares falling by 16%.

Weighted Average Cost of Capital (WACC)

The WACC is the cost of the resources used by the company when operating; It is a cost
from the company's point of view, but it is a performance from the point of view of the
providers of funds, such as shareholders and investors (Court, 2012).

For us, in simple words, The WACC is a weighted average between cost and required
profitability.

Calling WACC "cost of capital" or "cost of resources" produces errors because it is not a
cost (Fernandez Pablo, 2013).

DEBT EQUITY
Long-term debt, 2017 $6,499,432 Risk free rate, rf 1.75%
Long-term debt, 2016 $3,364,311 Expected market returm Erm 7.50%
Average Debt $4,931,872 LUV beta 1.36
Interest paid, 2017 $238,204
Interest cost, rd 4.83% Cost of equity, re 9.57%

Income before tax, 2017 $485,321 Share Price (right now) $391.43
Income tax expense, 2017 -$73,608 Share outstanding 434,690
Tax Rate (T) -15% Market value of equity (right now $170,150,707

Weight of debt (D/D+E) 3.68% Weight of equity (E/D+E) 96.32%

E = Market value of the share capital (Equity)

D = Market value of the debt
V = Value of the total capital of the company (stock and third-party capital)
E / V = Value of the share capital as a proportion of the value of the total capital of the
company

20
D / V = Value of the debt as a proportion of the total capital of the company (equity and
equity)
Rd = Minimum required return to shares
Re = Cost of debt
T = Corporate tax rate
Weight of equity (E/E+D) 96.32%
Cost of equity, re 9.57%
Weight of debt (D/D+E) 3.68%
Interest cost, rd 4.83%
Tax Rate -15%
WACC 9.42%

Capital Asset Pricing Model (CAPM)

The CAPM can be applied in various situations, such as the evaluation of the impact of
the risk generated in the company's shares for a new project; the definition of the price of
assets that were not yet traded in the market; or the verification of the reasonableness of the
return of certain assets.

With the CAPM method, we can appreciate that investors, certainly, they opt for those
investments that imply the highest expected return for a certain level of risk.

We used the Capital Asset Pricing Model to calculate Netflix's cost of equity. The three
variables we used to calculate the CAPM are as follows:

CAPM
Beta B 1.36
Risk Free Rate Rf 1.75%
Return on market portfolio Rm 7.50%
Market Risk Premium Rm - Rf 5.75%
Rf + B ( Rm - Rf ) Cost of Equity 9.57%

Rf = represents the risk-free investment return rate

B = represents the Beta of the investment (or the sector), which indicates the sensitivity of
the investment (i) to systemic risk (market risk)
Rm = represents the expected average return of risk assets available in the market
With this data, and applying this formula, we obtain the equation of the CAPM model that
is used to determine the expected return of an investment alternative, given the level of risk
relative to the market.

21
 Income tax (Assumed) 28%
WACC 9.42%
Period: 2014 2015 2016 2017
INCOME
• NOPAT = OPERATING PROFIT x (1-t)
STATEMENT NOPAT $289,907 $220,195 $273,451 $603,849

•CAPITAL = Total assets - non-financial

BALANCE liabilities- Non-operating assets
CAPITAL $7,042,500 $10,202,871 $13,586,610 $19,012,742

NET • It's the investment to grow:

NET INVESTMENT = capital needed next
INVESTMENT year - current capital NET INVESTEMENT $3,160,371 $3,383,739 $5,426,132 $1,901,274

• It is the free cash flow for all investors:

FREE CASH FLOW FCFF - NOPAT = inversión neta
FREE CASH FLOW -$2,870,464 -$3,163,544 -$5,152,681 -$1,297,425

• Ca s h flows must be discounted at present

Discount factor
VP FCFF va l ue i n order to a dd them. The discount
fa ctor i s 1 / (1 + wa cc)n $0.91 $0.84 $0.76 $0.70

VP of free cash flow -$2,623,284 -$2,642,167 -$3,932,899 -$905,013

VALUE FIRM • It i s the s um of the free cash flow that the
compa ny wi ll generate throughout i ts life
Value firm -$10,103,363

Net Operating Profit after Taxes (NOPAT)

As you can see in the previous example, in 2017 the company has Net Income of
558,929 USD and NOPAT of 603,849 USD. Let's see the relationship between these
numbers.

Operating profits represent the company's earnings before interest and taxes, so they
show what the company would earn if it had no debt (no interest). From there, we can
calculate a new tax rate multiplying $ 603,849 for one minus the assumption of the tax rate
of 28% (we put this tax rate for this year). And we got the NOPAT for each period.

As we can see, NOPAT represents the operational income of Netflix, which was higher
in 2017 and increased 313,942 USD compared to 2014, this happened despite the fact that
operating revenues were higher in 2017, the positive NOPAT means that there are gains in
the operations, if it were negative (which is not the case) means that we have lost

In addition, we use NOPAT as a starting point to calculate free cash flow (FCFF).

Capital5

Working capital is a measure of a company's short-term liquidity or its ability to cover

short-term liabilities. It is defined as the difference between current assets and current
liabilities of the company.

5
Takem from
https://www.gurufocus.com/term/ChangeInWorkingCapital/NFLX/Change%252BIn%252BWorking%252BCa
pital/Netflix%2BInc
22
 Changes in working capital are reported in the cash flow statement as it is one of the
main ways in which net income can differ from operating cash flow.

Now in the balance we will take the total assets as tools, inventory machines, properties,
Netflix that is the capital.

To carry out an exhaustive analysis of working capital, it can be observed in 2017 with a
relationship with 2016; an increase in working capital was observed, which places Netflix
in an advantageous position from the point of view of the possibility of satisfying its short-
term obligations.

Net Investment

The great bet of Netflix is a plan of expansion in the market and consolidation as the
leader in the Internet streaming service.

According to the statistics portal, Statista6 2016, half of the Netflix users come from the
USA, however, the company is making great efforts to be present in other countries and,
therefore, obtain more profits.

We can appreciate that Netflix's net investments are strong, but in 2016 and 2017 it was
much higher compared to the other periods worked; this is possible due to the number of
series that premiered and filmed. In 2016, Netflix had a net investment of 5,426,132 USD.

Note: The net investment in 2017 we are assuming that we are going to grow 10%, We
are taking course, created a scenario. This net investment means that Netflix is growing in
the sale of accounts.

But Netflix has indicated that its strategy is simple, maintain its leadership: to earn
money you must invest. It is expected that by the end of this year Netflix will invest USD
8,000 million in the realization of its own series, films and the incorporation of new clients.

Free Cash Flow (FCFF)

Now let's find the Free Cash Flow, that's why we are going to subtract the NOPAT - Net
Investment.

This result can be interpreted as follows, for the year 2016, if Netflix plans to earn
273,451 USD in its operations, but has to invest 5,426,132 USD will have a negative FCFF
of 5,152,681 USD, this is not a bad thing, it simply means exit of money, (If the company
reduced the investment the FCFF could come out positive).

The negative FCFF also means that what Netflix invested was greater than what it
earned.

6
Takem from https://www.bloomberg.com/quote/ROE:LN
23
 But Netflix has said that it does not worry about the negative free cash flow7.

Discount Factor

To find the discount factor we will take into account the WACC we found earlier. In
2016, it gives me 0.76, which means that of every dollar I have to pay or receive within a
year today, I assign it a 0.76 cents.

0.84 means that for every dollar you receive in 2015 today I assign you a value of 0.84
cents.

Present Value of Free Cash Flow

Let's talk about the VP FCFF Multiplying the cash flow of each year by its factor and
adding all the results, we obtain the estimated value of the firm by cash flow. In this case
has a negative value, given the negative free cash flows as well and everything explained
above.

Long – Term Financial

Period 2017 2016 2015 2014

Increase in sales $2,862,044 $2,051,158 $1,274,855

REQUIRED EXTERNAL FINANCING $2,922,662 $2,027,249 $976,677

growth rate 32.41% 30.26% 23.16%

NEW INVESTMENT $6,162,082 $4,110,663 $2,362,942

REQUIRED EXTERNAL FINANCING $4,430,965 $2,982,060 $1,421,017

INTERNAL GROW RATE 9.11% 8.31% 9.23% 11.63%

IGR 0.09 0.08 0.09 0.12

SUSTAINABLE GROWTH RATE 48.33% 42.12% 42.36% 44.10%

ROE 15.60% 6.97% 5.52% 14.36%

ROA 0.029 2.94% 1.37% 1.20% 3.79%

Required External Financing

Net Assets x Increase Reinvested

Sales in Sales Earning

7
Takem from https://www.fool.com/investing/2018/01/27/netflix-doesnt-care-about-its-free-cash-flow-
and-n.aspx
24
 As we can see in the table above, Netflix's external financing has increased from USD
976,677 in 2017 to USD 2,922,662 in 2017, a considerable sum. Netflix decided this in
order to finance their shows. Proof of this is that Netflix sold 1.5 billion dollars in bonds so
that they can include content acquisitions, production and development, as well as possible
acquisitions.

New Investment

Growth Rate x Initial Assets

The new investment has increased over the years, this due to: Netflix's strategy is to
increase and improve the offer of films, series, documentaries and, of course, the material
under its own production, so that its platform is much more attractive or does not stop
attracting the attention of users.

Required External Financing

New Investment Reinvested Earnig

Similar to what was explained above, but using the new investment found previously
subtracting the profits reinvested in the company itself for its own benefit and good
functioning.

Internal Growth Rate

Reinvested Earnigns
Assets

IGR

Plowback Ratio x Return on Equity x Equity

Assets
Reinvested Earnigns Net Income
Net Income Equity

Sustainable Growth Rate

Plowback Ratio x ROE

As we can see the Netflix Sustainable Growth Rate has increased progressively during
all the periods studied, this is good if it continues for the following years, since this would
represent the maximum rate of growth that Netflix would achieve without having to
increase its indebtedness , using self-financing.

25
Return on Equity (ROE)

The ROE is understood as the one understood as the return on equity. The ROE
according to Bloomberg is defined as the quotient between net profit after taxes / equity.

If we compare the last years, we see that between 2014 and 2015 the return on equity
has fallen more than half. It is seen that the equity has been growing over time and in recent
years its growth seems to be constant (it should be noted that part of the growth of the
equity is due to the withholding of profits, since the company does not distribute
dividends).

In 2016 and 2017, a scenario similar to that of 2014 with 2015 occurred, as the return on
equity ROE has fallen more than half, despite the fact that the equity has been growing, due
to the fact that in July 2016 it was a bad month for Netflix, since it suffered a abysmal was
the fall of subscribers in the second quarter compared to the first. In the international
market, the streaming company reported a decrease of more than 50% in the same period.

In 2017 the picture changed as Netflix released Stranger Things, a series of low budget
and also Narcos released its second season on September 2 and thanks to this Netflix
attracted 3.6 million new global subscribers, 56% more than the 2.3 million that predicted
Wall Street8.

Stockholders'
ROE Net income
equity
2014 14.36% 266,799 1,857,708
2015 5.52% 122,641 2,223,426
2016 6.97% 186,678 2,679,800
2017 15.60% 558,929 3,581,956

8
Taken from https://www.reuters.com/resources/archive/us/20110915.html
26
Merger and Acquisition

Acquisitions: Netflix and Millarworld Comics

In August 2017, Netflix announced that it acquired Millarworld, the comic book
company founded by Mark Millar, who has Kick-Ass in his comic book catalog.

The first purchase of Netflix will open the door for more content to develop and create
your own Millarworld universe, just like Marvel.

The brands of Kick-Ass is not part of the acquisition because there are already film
adaptations of these comics, however, the remaining and new characters of Millarworld
will be part of Netflix. The details of the deal have not been published so far. So far there is
no more information.

Merger: Between Apple and Netflix.

There's a 40% chance Apple will buy Netflix, say top financial analysts

Buy, Why?, Well, because Donald Trump corporate tax cut, for companies to bring
cash back to the US, gives to Apple extra cash to acquire other firms like Netlix. Apple will
have a much bigger budget.

Analysts believe that, Netflix will likely be absorbed up by Apple before the end of
2018. Experts say that there's a 40% chance that the merger will happen this year.

For the first time, Apple has recently announced it would be heading into the content
creation realm with a scripted series starring Jennifer Aniston and Reese Witherspoon.

DISCUSSION

While it is true that technologies are advancing rapidly, we must also bear in mind that
there is also a percentage that does not have this technology or has all the resources to reach
it (economic, technological, updating) or the country's own media , we believe that Netflix
must also see what solution it can give so that they can have access to them creating new
markets for those niches because we all deserve to have a better quality of life and
accessibility to the technology and the things that lead to that.

Another point that we think Netflix is not taking into account is to create alliances with
governments and these in turn with the provinces to create a motivational strategy.

There is another thing that must take into account and is that by not placing all countries
with the same number of seasons of series or premieres after several weeks or months

27
makes the public look for other alternatives such as pirated pages and other applications
since this generates anxiety in the viewers who are fans of the productions that it transmits.

CONCLUSIONS

 At the moment Netflix will continue to grow because it adapts quickly to

technology, which today is very consumed by people and is used to have high
returns.
 Netflix must be careful with the issue of removing some chapters or publish them
before in other countries that can usually remove audiences and these can find other
means to visualize it (websites, competition).
 The acquisition of new producers will make more variety of films and tertiarize on a
smaller scale. While it is true that this will lead to maybe having less profit for the
contractions, but this is an investment in the medium and long term, because with
the production of their new series or movies, this will greatly increase the
company's profits.
 The company has increased its net worth by 154.36% in 2014 compared to 2017
despite having stock market declines or the global slowdown.
 If we observe the balance sheet in the cash and cash account equivalents in 2017,
increased by 92% with respect to the previous year, you should be careful because
there is money that is not working and is not earning interest, it is advisable to have
at least to have the money invested.
 The debts have increased, but this is proper because the company has grown and
this gives us a good signal, because they are working with money from third parties
but at the same time they are making considerable profits which allow us to
indirectly grow with loans or contributions of others.

28
REFERENCES

Pastor, J. (2012). “Análisis Financiero”. [PDF]. Universidad San Martin de Porres.

Obtained from
http://www.usmp.edu.pe/recursoshumanos/pdf/3Analisis%20Financiero.pdf

Baptista, D.; Crespo, M. & De la Ascensión, G. (2016). “NETFLIX: Una mirada interna a
sus finanzas”. Obtained from
http://fcea.edu.uy/Jornadas_Academicas/2016/Ponencias/Administracion/Netflix%20
Diego%20Baptista%20Crespo%20Gonzalo%20de%20la%20Ascencion.pdf

Expended Ramblings, Buzzfeed, MentalFloss. David. (2015). "Netflix, en números".

Obtained from https://www.netflixados.com/netflix-en-numeros/

NASDAQ. (2018). "Netflix, Inc. Analyst PE Estimates" Obtained from

https://www.nasdaq.com/symbol/nflx/financials?query=balance-sheet

United States Securities and Exchange Commission. (2017). “Annual report Netflix, Inc.”.
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c8b76911ecd5

Business Insider. (2015). “Netflix will spend $5 billion on programming in 2016”.

Obtained from http://uk.businessinsider.com/netflix-will-spend-5-billion-on-
programming-in-2016-2015-2

Quora. (2017). “Why is Netflix in competition with Apple, Amazon and Google?”.
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Amazon-and-Google

Izquierdo-Castillo, J. (2015). “The new media business concept led by Netflix: a study of
the model and its projection into the Spanish market”. Obtained from
http://eprints.rclis.org/30307/1/art%C3%ADculo%20EPI.pdf

Barr, T. (2011). “Television’s newcomers: Netflix, Apple, Google and Facebook”.

Obtained from
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URCE2

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http://www.marketplace.org/topics/tech/netflix-becomesmovie-studio

29
ANNEXES

Annex 1
Cash Flow of Netflix

CASH FLOW
Period Ending: Trend 31/12/2017 31/12/2016 31/12/2015 31/12/2014

Net Income $ 558,929 $ 186,678 $ 122,641 $ 266,799

Cash Flows-Operating Activities

Depreciation $ 6,330,385 $ 4,924,978 $ 3,547,045 $ 2,781,798

Net income Adjustments $ -8,734,239 $ -6,778,020 $ -4,592,012 $ -3,168,777

Changes in Operating Activities

Accounts Receivable $ - $ - $ - $ -

Changes in Inventories $ - $ - $ - $ -

Other Operating Activities $ -307,893 $ -5,324 $ 327 $ -61,604

Liabilities $ 366,870 $ 197,704 $ 172,560 $ 198,267

Net Cash Flow-Operating $ -1,785,948 $ -1,473,984 $ -749,439 $ 16,483

Cash Flows-Investing Activities

Capital Expenditures $ -173,302 $ -107,653 $ -91,248 $ -69,726

Investments $ 268,040 $ 235,536 $ -8,074 $ 100,316

Other Investing Activities $ -60,409 $ -78,118 $ -79,870 $ -73,456

Net Cash Flows-Investing $ 34,329 $ 49,765 $ -179,192 $ -42,866

Cash Flows-Financing Activities

Sale and Purchase of Stock $ 56,225 $ 26,279 $ 60,351 $ 53,464

Net Borrowings $ 3,020,510 $ 1,000,000 $ 1,500,000 $ 400,000

Other Financing Activities $ 255 $ 230 $ -545 $ -1,093

Net Cash Flows-Financing $ 3,076,990 $ 1,091,630 $ 1,640,277 $ 541,712

Effect of exchange Rate $ 29,848 $ 9,165 $ -15,924 $ -6,686

Net Cash Flow $ 1,355,219 $ -341,754 $ 695,722 $ 508,643

30
Annex 2
Income Statement of Netflix

INCOME STATEMENT
Period Ending: Trend 12/31/2017 12/31/2016 12/31/2015 12/31/2014

Total Revenue $ 11,692,713 $ 8,830,669 $ 6,779,511 $ 5,504,656

Cost of Revenue $7,659,666 $6,029,901 $4,591,476 $3,752,760

Gross Profit $4,033,047 $2,800,768 $2,188,035 $1,751,896

Operating Expenses

Research and Development $ 1,052,778 $ 852,098 $ 650,788 $ 472,321

Sales, General and Admin. $ 2,141,590 $ 1,568,877 $ 1,231,421 $ 876,927

Non-Recurring Items $ - $ - $ - $ -

Other Operating Items $ - $ - $ - $ -

Operating Income $ 838,679 $ 379,793 $ 305,826 $ 402,648

Add'l income/expense items $ -115,154 $ 30,828 $ -31,225 $ -3,060

Earnings Before Interest and Tax $ 723,525 $ 410,621 $ 274,601 $ 399,588

Interest Expense $ 238,204 $ 150,114 $ 132,716 $ 50,219

Earnings Before Tax $ 485,321 $ 260,507 $ 141,885 $ 349,369

Income Tax $ -73,608 $ 73,829 $ 19,244 $ 82,570

Minority Interest $ - $ - $ - $ -

Equity Earnings/Loss
$ - $ - $ - $ -
Unconsolidated Subsidiary
Net Income-Cont. Operations $ 558,929 $ 186,678 $ 122,641 $ 266,799

Net Income $ 558,929 $ 186,678 $ 122,641 $ 266,799

Net Income Applicable to

$ 558,929 $ 186,678 $ 122,641 $ 266,799
Common Shareholders

Annex 3

Balance Sheet of Netflix

31
 BALANCE SHEET
Period Ending: Trend 12/31/2017 12/31/2016 12/31/2015 12/31/2014

Current Assets

Cash and Cash Equivalents $ 2,822,795 $ 1,467,576 $ 1,809,330 $ 1,113,608

Short-Term Investments $ - $ 266,206 $ 501,385 $ 494,888

Net Receivables $ - $ - $ - $ -

Inventory $ - $ - $ - $ -

Other Current Assets $ 4,847,179 $ 3,986,509 $ 3,121,125 $ 2,318,557

Total Current Assets $ 7,669,974 $ 5,720,291 $ 5,431,840 $ 3,927,053

Long-Term Assets

Long-Term Investments $ - $ - $ - $ -

Fixed Assets $ 319,404 $ 250,395 $ 173,412 $ 149,875

Goodwill $ - $ - $ - $ -

Intangible Assets $ 10,371,055 $ 7,274,501 $ 4,312,817 $ 2,773,326

Other Assets $ 652,309 $ 341,423 $ 284,802 $ 192,246

Deferred Asset Charges $ - $ - $ - $ -

Total Assets $ 19,012,742 $ 13,586,610 $ 10,202,871 $ 7,042,500

Current Liabilities

Accounts Payable $ 674,649 $ 510,474 $ 393,880 $ 271,327

Short-Term Debt / Current

$ - $ - $ - $ -
Portion of Long-Term Debt
Other Current Liabilities $ 4,791,663 $ 4,076,183 $ 3,135,744 $ 2,391,827

Total Current Liabilities $ 5,466,312 $ 4,586,657 $ 3,529,624 $ 2,663,154

Long-Term Debt $ 6,499,432 $ 3,364,311 $ 2,371,362 $ 885,849

Other Liabilities $ 3,465,042 $ 2,955,842 $ 2,078,459 $ 1,635,789

Deferred Liability Charges $ - $ - $ - $ -

Misc. Stocks $ - $ - $ - $ -

Minority Interest $ - $ - $ - $ -

Total Liabilities $ 15,430,786 $ 10,906,810 $ 7,979,445 $ 5,184,792

Stock Holders Equity

Common Stocks $ 1,871,396 $ 1,599,762 $ 1,324,809 $ 1,042,870

Capital Surplus $ - $ - $ - $ -

Retained Earnings $ 1,731,117 $ 1,128,603 $ 941,925 $ 819,284

Treasury Stock $ - $ - $ - $ -

Other Equity $ -20,557 $ -48,565 $ -43,308 $ -4,446

Total Equity $ 3,581,956 $ 2,679,800 $ 2,223,426 $ 1,857,708

Total Liabilities & Equity $ 19,012,742 $ 13,586,610 $ 10,202,871 $ 7,042,500

32
Annex 4

In this link you can find our work in excel with all the operations done by ourselves.

NETFLIX.xlsx

33