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Analysts

Ryan Christian ryan-christian@uiowa.edu William Spooner william-spooner@uiowa.edu

Company Overview Netflix is a media streaming service based in the United States. The company started in 1997 as a DVD-by-mail service, but in recent years has pivoted to a leading media and content streaming service. For a monthly subscription fee, Netflix offers over 125M hours of movies, TV shows, and documentaries to watch on demand using an internet-connected device. Netflix launched their streaming service in 2007 and has cemented itself at the forefront of content streaming services in domestic and international markets. Netflix surpassed 100M total subscribers in Q2 2017 and continues to expand internationally at rapid rates. This meteoric rise has positioned Netflix as the industry leader in media streaming services across the globe. Netflix's main goals are to strengthen their offering of Netflix Original content, grow their subscriber base internationally and domestically, and to fend off competition.

Stock Performance Highlights 52-week High $204.38 52-week Low $110.68 Beta 1.225

Share Highlights Market Capitalization 82.3B Shares Outstanding 428.822M P/E (forward) 231.24 EPS (2017) $0.44

Company Performance Highlights

ROA 2% ROE 7%

Financial Ratios Current Ratio 1.25 Debt to Equity 330%

Current Price: $192.02 Target Price: $245-250

Key Investment Highlights • Favorable economic conditions- Based on current

and projected macroeconomic indicators the economy is expected to see strong and steady growth for the near future. While interest rates are expected to rise, this is to combat inflation from the growing economy.

• International growth opportunities- Netflix is positioned to be a leading streaming provider for international markets like Mexico, Brazil, Argentina, and Canada. As a result, Netflix is seeing substantial growth in these regions that is on pace to carry the company to the rank of the world’s biggest media streaming service. While domestic competition is something to take into account, international competition is much lighter and will allow Netflix to expand into a truly global company.

• Content creation- With increased competitors in the domestic marketplace Netflix will be required to spend large amounts of money to finance the production of original content. While the original 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 2017 and 2018 as they spend upwards of $8 billion on original content. This content will contribute additional growth to their subscriber base and fuel future earnings for the company. One-Year Stock Performance

Source: Google Finance1

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Executive Summary

As of November 10, 2017, our University of Iowa Krause Fund analyst team recommends a “buy” rating for Netflix Inc. stock. This report contains our analysis of the company and the reasons that we have for our rating. In our opinion, Netflix is well positioned to expand into international markets such as Mexico, Brazil, and Canada. International subscribers surpassed domestic subscribers in Q3 2017 and Netflix expects to see strong growth from their overseas operations over the course of the foreseeable future. Netflix is focused on investing heavily in original content to remain the industry leader in media streaming. With the addition of competitors in the industry, Netflix seeks to distinguish themselves with a rich and plentiful content library. Netflix has a strong domestic subscriber base and in order to prevent subscriber losses as competitors enter the market place they must continue to offer award winning content at an affordable monthly rate. Netflix is also focused on creating original content with wide appeal in emerging international markets. This content diversification ensures that Netflix will be able to increase their international subscribers while maintaining a strong grasp on the domestic market. Based on our expectation of continued economic growth, we expect Netflix to grow their subscriber base and minimize the effects of increased competition.

Macroeconomic Outlook U.S. Real Gross Domestic Product Real Gross Domestic Product (GDP) is the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production2. Consumer discretionary purchases make up approximately 69% of U.S. Real GDP2, therefore, growth of Real GDP coincides with growth of the consumer discretionary sector.

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 a key component in the recent Real GDP growth. Additionally, the outlook for continued growth in international

markets has given U.S. companies an upbeat outlook for the near future42.

The election of Donald Trump offers the potential for policy changes that would result in as stronger Real GDP for the U.S. Aside from running on the promise of 3% annual Real GDP growth6, Trump has proposed several measures that would both directly and indirectly influence an increase in Real GDP. The agenda includes tax cuts for the general population, corporations, small businesses, overseas repatriation, and infrastructure spending. These measures, if enacted, would all contribute to increased GDP growth at or above 3%4. Jerome Powell, recently nominated to replace Janet Yellen as chair of the Federal Reserve, is expected to pursue a slow to moderate increase in interest rates to fight inflation as the economy continues to heat up following the crash of 200843. Powell has experience working on Wall Street, as well as working with lawmakers to avoid a government shut down in 2011. The cool-tempered Powell is expected to be a safe choice to head the Fed. With these key factors in mind, we expect that Real GDP growth will be sustained in the 2.8 – 3% range. As a result, the consumer discretionary sector stands to benefit from the increased spending from consumers as well as the potential benefits of corporate tax cuts and overseas repatriation of profits. Consumer Confidence Index (CCI) The Consumer Confidence Index is a leading economic indicator that surveys 5,000 random households each month asking questions regarding their outlook on the economy. Questions gauge opinions on the current state of the economy and about future expectations regarding growth and job prospects. A healthy CCI is correlated with increases in consumer spending6. With increased consumer spending, the consumer discretionary sectors and Netflix stand to benefit.

Source: CNBC (Conference Board)8

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The CCI in October was at a level of 125.9, nearing an all-time high of 128.6 set in 20007. With the CCI nearing at extremely high-levels the consumer discretionary stands to benefit. As consumers gain confidence in the stability of the economy as well as job prospects they will spend more on discretionary purchases such as media streaming platforms such as Netflix. 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 Statistics9

The CPI rose 0.5% in September, continuing a three-month upward trend. Over the last twelve months, the index has risen 2.2%. This increase during the past 12 months can in large part be attributed to rises in food and gasoline prices because of recent hurricanes. Without the increases of the food and energy components the CPI increase comes out to roughly 0.1%.

While the CPI is temporarily overstated as a result of the recent hurricanes, the fed is still worried about further increases in inflation due to low unemployment and a strengthening global economy10. The Fed is expected to raise the Fed Funds Rate in order to keep inflation around their target rate of 2%. An inflation rate around 2% ensures that prices of essential and non-essential goods should not change dramatically from year to year. Our team is confident that the Federal Reserve will be able to successfully maintain a constant growth in CPI while allowing the economy to continue a healthy upward trajectory. Unemployment Rate The unemployment rate is a measure of the proportion of eligible workers who are actively seeking work and those who

are unable to acquire employment. This statistic is an extremely reliable gauge of the strength of the economy. With a lower unemployment rate the economy is poised to see increased growth of key metrics like Real GDP. Additionally, low unemployment indicates that individuals pursuing an income through employment have a stable income and can spend more money on discretionary purchases.

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 more individuals actively pursuing employment. As more workers enter the workforce there will be a slight increase in the unemployment rate. Ultimately, an unemployment rate of 4.4 – 4.6% is still an indication of a strong and healthy economy. The consumer discretionary sector will benefit as a result of the strong level of employment within the U.S. Interest Rates The Federal Funds Rate is the rate charged by banks for overnight loans to other banks. This rate influences all other interest rates, including savings accounts, mortgages, treasury notes, and bonds. Higher interest rates will increase the cost of borrowing and slow economic growth, but incentivize saving. Lower interest rates lead to decreases in the cost of borrowing and promote economic growth. Interest rates play a key role in consumer discretionary purchases as consumers are forced to either borrow or save as a result of the interest rates. Market expectations are that the Fed will raise interest rates before the end of the year. The favorable economic conditions and solid GDP growth are signals to the Fed that interest rates should increase to prevent runaway inflation13. While raising interest rates will hurt some discretionary spending, we believe the rate hike is necessary to preserve the current state

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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 see continued growth in the capital markets. Most encouraging for global equities is the fact that global economic growth is currently seeing a level of synchronization not seen since before the Great Recession. The U.S. is growing strong, the Eurozone has jumped the hurdles of its 2010-2012 debt crisis, and China has calmed the fears induced by its summer 2016 currency devaluation. Pair a global economy forecast to grow at 3.6% with impending tax cuts and a low inflationary environment, and we do not expect to see a significant market correction in the foreseeable future. The consumer discretionary sector stands ready to benefit from optimism in the capital markets as it will lead to increases in consumer confidence and spending, resulting in stronger market performance for publicly traded companies in the sector.

Industry Analysis 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 would schedule shows to be broadcast at a set time and date. Consumers could either sit down during a scheduled time slot to watch their show, or record to watch later. With advancements in technology and the innovations of companies such as Netflix, consumers may now watch their desired content on demand and can watch their show anywhere with an internet connection.

Source: Statista15

With the advent of reliable high-speed internet and expanded Wi-Fi and cell data coverage, people are increasingly able to use the power of the internet to watch their favorite entertainment programs outside of the constraints of their living room. Now more than ever, people can watch their entertainment on any internet-capable device, at any time, from the comfort of their own homes or on the go. As consumers begin to expect more from their entertainment providers, they have resorted to demanding bespoke cable bundles, or "cutting the cord" to their cable companies altogether. Millennials spend more time streaming content than they do watching TV, and more than 20 percent of them are viewing shows on their mobile devices16. As a result, streaming services are growing rapidly, with around 60% of consumers using them monthly17. Media streaming has emerged as the most effective way to consume entertainment.

Source: Statista17

The chart shows U.S. historical and forecasted streaming video subscription revenue from 2011-2020. We believe this trend of increasing revenues will continue. This growth will largely be driven by growing numbers of consumers having better access to a more proliferated and faster internet over the coming years.

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Major Industry Players Since its inception in 2007, the video streaming industry largely been dominated by Netflix. Services like Amazon Prime, Hulu, Roku, PlayStation Vue, HBO Go, and YouTube Red quickly rose up to challenge Netflix. However, the major players are still Netflix, Amazon Prime, and Hulu.

U.S. Video Streaming Market Share - Major Players

Source: Statista18

Netflix holds approximately 50% of the U.S. Video Streaming 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 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 other content and produce original content. Amazon has similar advantages to Netflix in terms of consumer data, and is able to leverage their tremendous spending power to add to their content library. As a joint venture between Disney, 21st Century Fox, Comcast, and Time Warner, Hulu is somewhat different to its competitors in the industry. Their platform is positioned more as a vehicle to deliver existing television series already owned

by its parent companies. While they are considered a major player at around 14% market share, they don't have the same advantages that Netflix and Amazon Prime do. They are not offered in nearly as many territories, and do not have the same advantages in consumer data collection. 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 popular and highest-rated shows that streaming services had 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.

Netflix Originals Ratings (1-5 Stars) vs. Other Content

Source: Business Insider20

Source: TechCrunch22

As a result of the quality of the Netflix Originals, the original content is among the most highly-demanded content across various streaming platforms. The chart below shows demand expressions in millions for original content in 2016. It is evident that there is a trend in consumer preference towards more original content. As a result, our team believes that Netflix is poised for success over their competitors because of the large quantity of their original content.

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Source: BGR21

As consumer demand for original content increases so does the amount of money spent on original content for the streaming giants.

Source: Recode23

The aggregation of original content is the main focus for the streaming giants in the near and long term future. For 2017, Netflix is set to spend the most, $6bn, followed by Amazon 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: Factsset24

Market capitalization is defined as: a company's stock price multiplied by current shares outstanding. It is a helpful measure to understand the size and valuation of a company, as well as to gauge things like growth or risk potential. In our 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 lagging behind comparable companies in terms of EPS. This is expected because of the high cost of original and leased content. We believe that as Netflix grows their content library and increases their subscriber base the firm will see increases in EPS as they become more profitable.

Source: Factset24

The table above outlines margin calculations for Netflix and

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comparable firms. It should be noted that Netflix's EBITDA margin is exceptionally high. This is because Netflix has a large amount of content licensing contracts on its balance sheet. These assets depreciate every year over the life of the contract. This contributes a large amount to Netflix's amortization costs, which in turn raises EBITDA substantially. When Amortization costs are removed, such as in EBIT calculations, we see that Netflix is more in line with its peer in the internet space, Amazon. This is not to mention that Netflix has a reasonable gross margin, which is comparable to entertainment firms in the analysis. We predict that, as Netflix weans itself off these licensing agreements and replaces them with original contracts, EBITDA will move to a more accurate level.

Porter’s Five Forces Competitive Rivalry: High

Netflix faces high competitive rivalry in the streaming business. The main area of competition is in content aggregation as consumers want high-quality content. Netflix has the largest market share, followed by Amazon, and then Hulu. Netflix has been the industry leader so far in producing original content, but Amazon, Hulu, and others are projected to spend increasing amounts in 2017. We predict that this battle over content aggregation and creation will lead to increased content costs for the foreseeable future. While this increased expense will affect the bottom line for Netflix they have built a strong subscriber base that will afford them the opportunity to spend the required amounts on the best content for their platform. Once Netflix has accumulated enough content they will be able to slow their spending in this area and focus on increasing their margins and revenues.

Bargaining Power of Suppliers: Moderate

Netflix faces a key dilemma when it comes time to decide whether to make or buy content. Content licensing can cost a hefty price- Netflix spent $13.5M on each episode of The Walking Dead in 201425. Licensing content can prove to be troublesome. Netflix has benefited from a licensing agreement with Disney, however, Disney recently announced they will not renew the agreement with Netflix and will instead pursue their own streaming platform in 2019. Among all entertainment companies, Netflix has been the second largest producer of original content, behind only Disney26. The good news is that streaming companies can also produce their own content at a lower cost. However, that includes its own risks - 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,

which is much cheaper than most traditional cable packages. Consumers are then left with the choice of which streaming service to subscribe to. It is also common for people to subscribe to multiple streaming services based on what content they enjoy. It is worth noting that Netflix recently raised its prices across domestic subscription options and the consensus opinion is it demonstrated their pricing power over their current subscriber base.

Threat of Substitutes: Moderate

Each streaming platform offers a specific and unique lineup of content that cannot be duplicated. Therefore, consumers are free to choose which streaming platform they subscribe to and the choice is based primarily on the content provided by the service. Additionally, based on the relatively low monthly fee for these services it is quite common for people to subscribe to several the services based on their content desires. This means that consumers do not feel the need to drop a streaming service to add another, minimizing the threat of substitutes.

Threat of New Entrants: Low

The barriers to entry to enter the streaming business are quite high. Purchasing or producing content is quite expensive, so only companies that already have sizable content libraries or large amounts of capital will be able to get into the business. Additionally, the investment required to create a streaming platform and either rent or own the necessary servers is very capital intensive. This limits the number of entrants into the streaming industry to companies with a distribution platform or large library of original content.

Catalysts for Growth & Change Higher Internet Speeds Higher internet speeds and advances in mobile technology are boons for the industry. Wi-Fi speeds are continuously getting faster and the capabilities of 4G and LTE offer a lot of potential for the streaming companies. As consumers can more easily utilize internet services outside of the home, the demand for streaming will continue to increase. Consumers will have more time to engage with their favorite shows and movies which furthers the need for Netflix to continue to develop new and exciting content. By occupying more of the consumer’s time on a daily basis Netflix will cement its role in their routine.

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Mobile share of digital video plays 2013-2017

Source: Statista27

The above chart shows the percentage of total video plays that were viewed on mobile devices using a data internet connection. Since consumers are already using their devices to stream content on-the-go, streaming services will continue to capitalize on that opportunity by offering mobile apps and continually streamlining the mobile experience.

International Growth International growth is now a major focus in this industry. As technology upgrades trickle into foreign countries and their internet infrastructure improves, they become a desirable target for the streaming business. Now, as domestic revenue growth slows, streaming companies need to focus on providing international language support and creating content that appeals to the foreign markets.

Source: Business Insider28

As the previous graph shows, when Netflix does something as small as adding local language support to a country like Poland or Turkey, interest immediately jumps. With an initial investment in each foreign market Netflix can begin to see an increase in overall use for that region. We predict that

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 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 speeds at which users can stream content, that could kill business. However, it will be interesting to see how the situation affects international markets, as they don’t fall under the same regulation that U.S. markets do.

Original Content Creating and aggregating extensive libraries of original content will be the focus of streaming services going forward. Since most major streaming services offer very similar platforms and features, content will be the catalyst for consumers to choose one platform over another. Although content creation requires large up-front capital expenditures, creating content in-house will save money in the long run by avoiding the costs of negotiating contracts with outside 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- mail rental service. In 2007, the company capitalized on the opportunity to reach consumers instantly, and launched the video streaming service that it has become today. Now, Netflix has over 109 million global subscribers enjoying 125 million hours of available content. Since the launch of their hit show House of Cards in 2013, Netflix has been expanding into the television and film production business. Currently, the

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service provides more than 1000 hours of original 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: Netflix 10-Q29

The DVD rental service subscribers have been declining at a rapid pace since streaming began in 2007. We expect the DVD rental service to diminish and ultimately become non-existent by Q4 2020. The DVD segment composes a small percentage of total revenue and is losing subscribers at a very fast rate. This is not a significant concern for the company as there is an abundance of expected growth for their other business segments.

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 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 surpassed domestic subscribers. This trend is expected to continue as Netflix is growing international subscribers at some very high rates. Ultimately, Netflix will require this growth to continue to exceed analyst expectations in order to grow into their valuation.

Netflix Subscriber Count (millions)

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 Netflix is poised to become a huge media conglomerate that serves many different regions and across a variety of languages. Something that really stands out for Netflix is their willingness to spend on content filmed in foreign studios, with foreign actors, and in foreign languages. This content sparks international growth while also having substantial appeal in the U.S.

Number of U.S. Netflix DVD subscribers 2011-2017 (millions)

Source: Statista32

Platform Analysis Netflix's current platform operates much like many other web applications. Users log in to their computer, mobile device, gaming system, smart TV or other internet connected device 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,

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format, actor, or director. Additionally, based on the large amount of data Netflix has collected on viewing behavior they can recommend shows with a great deal of success. This results in consumers finding more shows they are interested in and spending more time on the platform.

Source: Forbes32 Netflix will also create specifically targeted "genres" for the user to watch based on this history, such as "Heist films" or "Coming of Age". The appeal of Netflix's recommendation algorithm is that users are given a whole host of content to watch up front, without having to dig too deep to find it. This way, Netflix can capitalize on having a vast array of content, yet make their platform experience much more user-friendly.

Netflix also utilizes this data to make decisions on what content to license, continue to license, or create. This allows Netflix to have a high success rate when it comes to creating shows with wide appeals while minimizing the shows they create that end up failing to connect with a large audience.

Cost Breakdown Currently, Netflix offers several different subscription plans. The U.S. options are broken down in the following diagram:

Source: Netflix34 U.S. subscribers are offered three pricing options ranging from $8-$14. The more expensive plans offer higher resolutions and more screens at once. Pricing was increased in October, the price for the Standard plan was raised by $1 and Premium was raised by $2. We predict that these prices will not be raised anytime soon. We expect that prices will be increase gradually and in small increments.

Internationally, subscribers are offered the same packages at similar costs. Generally, management has tried to match costs to the dollar, but that is not always possible with foreign

exchange rates constantly varying. However, management does generally try to start prices higher than lower, as its often easier to freeze or lower prices than to raise them. Additionally, offering the product at a bit higher price signals 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 Recently, Netflix has increased prices for their domestic streaming segment, issued debt to finance the production of additional original content, and demonstrated their ability to integrate international subscribers into their service. These items play a big role in the reason Netflix is poised to continue growing and remain a premier streaming service.

This October, Netflix announced price increases. This is behavior consistent with past company actions. Originally, streaming was a free add on to DVD customers. In 2011, streaming and DVD's were split, both costing $8. In 2014, streaming subscriptions were raised to $9. This October, the standard streaming plan was raised to $10 per month. These price increases demonstrate management’s belief that they have pricing power over their consumers. While competition 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, they tend to not lose subscribers. We predict this move will be 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 current long term debt of $3.36B. Netflix's objective is to continue high amounts of spending to develop an ever-growing library of original content in order to appeal to a greater array of customers. By increasing their appeal to more subscribers and fueling further subscriber growth, Netflix will be able to grow their subscriber base which has long term benefits. Once growth has slowed Netflix will be able to slow their spending on content and rely on their extensive content library. This approach has risks but is necessary if Netflix wants to keep expanding. This decision to spend large amounts on content will affect free cash flow for the company in recent years but with current domestic and international growth trends they should be cash flow positive by 2019.

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As seen in the chart below, Netflix's earnings per share have consistently beaten consensus estimates in recent quarters.

Netflix Historical EPS vs. Estimates

Source: Estimize37 In the past two years, Netflix has consistently beaten analyst EPS estimates. This performance displays the ability of Netflix to appeal to large numbers of consumers domestically and abroad. We anticipate that Netflix will continue to increase subscriber numbers at high rates, resulting in higher total revenue.

Competing Services Amazon Prime Instant Video is Netflix's largest competitor, with approximately 30% total market share. It originated as an add-on feature to Amazon's flagship subscription service, Amazon Prime. Amazon was able to gain video streaming market share extremely quickly by offering the feature to Prime subscribers at no extra cost. Amazon Prime Instant Video currently costs less than Netflix, at $100 a year. For that cost, Amazon Prime users get the right to stream thousands of hours of content.

In fact, Amazon has four times as many films available to stream than Netflix - 18,405 films vs. Netflix's 4,563, although Netflix has more TV shows38. Like Netflix, Amazon is beginning to produce original content as well. With a large market share almost the size of Netflix's and a large content library to back it up, Amazon currently stands as Netflix's greatest competitor in the video streaming space.

Hulu is Netflix's second-largest competitor, at around 15% market share. Hulu costs $8per month, however it should be noted that this subscription has commercials. To go commercial-free, consumers must commit to a $12 monthly fee. The other catch with Hulu is that users are only allowed to watch content on one screen at a time. Hulu is more TV-centric, drawing mostly on content that is already owned by its parent companies.

Following Amazon and Hulu are several other services. HBO Now is a service available to all current subscribers of HBO, and it streams all current and past HBO content.

Roku and YouTube Red are yet two more services that have 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 largest media provider in the industry. Netflix is the largest company in video streaming, able to provide targeted content to over 190 countries. It is also currently the only pure-play video streaming company that is publicly traded in the U.S. Brand Recognition Since launching its streaming business, Netflix has become a pop-culture phenomenon. Their content lineup includes hits 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 social media and traditional advertising. The following of those shows has largely spread through word-of-mouth and social media. Social media especially has been a boon to the brand, leading to the invention of phrases like "Netflix and Chill" or other jokes about the service. Netflix has become ingrained in the public consciousness as the way to spend lazy Sundays, date nights, and relaxation time after a long work day. Recommendation Algorithm/User Data Since the launch of its streaming service, Netflix has been able to collect vast amounts of data on its users' viewing preferences. This fact pushed the company to create a recommendation algorithm to make their extensive library of content more accessible and user-friendly to subscribers. Due to this algorithm, Netflix's user experience is noticeably smoother than its competitors. Having its hands on endless amounts of easily- quantifiable usage data puts Netflix's fingers on the pulse of consumer preference. From all that data, Netflix knows exactly what shows are being watched, by who, where, when, and for how long. This information is invaluable when deciding what type of content to add to its library.

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Weaknesses Suppliers becoming Competition In the beginning, the content behind Netflix's streaming service was all licensed. Netflix would sign contracts with content creators. to have rights to offer their content to Netflix subscribers. Now, those companies have decided to compete 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, and domestic growth has slowed recently. Netflix will look to the international markets to continue growing its base. This has led to a major problem with customers illegally sharing accounts with family and friends. Netflix already offers the option to have more screens with its premium package, but could stand to increase revenues if they found a way to cut down on account sharing. Capital Expenditures Netflix's new strategy is essentially a race to expand their content library. Netflix has announced that they plan to spend $8B in 2018 on original content, with the goal of having a library with 50% original programming39. These enormous up- front costs have taken a toll on the company's free cash flow, but we do expect this investment to result in healthier margins after the initial cost. Opportunities International Growth Netflix has a huge opportunity to become a ubiquitous video- streaming platform for the entire world. They have already taken steps toward this goal. By tapping into foreign markets, tailoring content towards foreign tastes, and providing foreign-language support, they are close to becoming the world standard streaming service. Technological Advances Technology is crucial to the evolution of Netflix. As the chart below shows, 64% of the world's population currently uses a mobile device. As more and more of the world uses

technology, that just creates more screens for Netflix to stream to. Especially since mobile broadband and data connections are becoming faster and more reliable, Netflix will have a huge opportunity to expand as technology offers more ways for subscribers to consume content.

Mobile Phone Users as Percentage of Global Population - 2019-2019

Source: Statista40

Threats Decreasing Subscription Growth Netflix currently relies exclusively on subscriptions as its sole source of revenue. If it does not find another source of revenue, i.e. advertising, it could theoretically reach a sort of "carrying capacity" for subscriptions, and be starved of the growth it needs to pay for its ever-increasing expenses. Foreign Exchange Rates With an international business growing at ever-increasing rates, Netflix will be exposed to increasing amounts of currency risk. Price Hikes If subscriber growth does not prove to be great enough to pay for increasing capital expenditures, Netflix may be forced to implement more price hikes on their subscription costs. This move would have the potential to alienate customers, and could possibly price out some subscribers from being able to afford Netflix's services. Losing large amounts of subscribers would be a disaster for Netflix.

Valuation Analysis Revenue Growth We project revenues to grow hand in hand with increases in subscriber growth. Additionally, with increases in subscription prices Netflix will see growth in their revenues. These two

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levers are the core factors behind Netflix revenues and will be the driving force behind revenue growth. We project fairly strong domestic growth coupled with strong international growth. Cost of In-house Production Cost of in-house productions account for a large part of Netflix’s expenses. Given the current competitive environment and current company guidance we expect that Netflix will continue to spend billions of dollars each year on the production of original content. After 2020 we expect content spending to begin to curtail yet still remain a significant expense for the company. Content Library 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 consumers make regarding which services to subscribe to. We anticipate that Netflix will look to continue to grow their content library a significant amount over the next 3 years and then continue to grow the library indefinitely. This growth is essential to Netflix’s ability to continue to grow its subscriber base as well as retain their current subscribers. Other Operating Expenses Netflix has an opportunity to grow into international markets and as a result will require increased spending on other expenses like marketing and administration. These increases are necessary to reach a larger audience and ensure the platform is adjusted to the different markets. Amortization Expense Netflix amortizes their content library over a long period of time. This amortization is done with the viewing habits of their subscribers in mind. The content is amortized more in its early years on the platform and then this amount declines over the duration of the program’s time on the platform. Netflix only amortizes their Netflix Originals because of the structure of these content assets. Capital Structure As a result of the high cost of original content it is necessary for Netflix to spend large amounts of money to acquire new content to keep subscribers utilizing the platform on a frequent basis. This large cost will lead to Netflix operating at a negative free cash flow for a number of years. As a result, Netflix will be required to continue issuing debt over a number of years. This is relevant to the valuation given their “junk bond” rating. Therefore, it is necessary to account for increasing debt levels within Netflix. Ultimately, we expect Netflix will continue with their current capital structure going

forward. Weighted Average Cost of Capital (WACC) We calculated a WACC of 8.27% using our capital structure of 95% equity and 5% debt. We expect Netflix to maintain this capital structure indefinitely. The WACC is derived using the information regarding cost of debt and cost of equity below. Cost of Debt To calculate our cost of debt, we added the default risk premium of a corporate bond associated with a BB- rating. This resulted in a 5.79% cost of debt. We then calculated the 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%. Cost of Equity We used the Capital Asset Pricing Model (CAPM) to calculate Netflix's cost of equity. The three variables we used to calculate the CAPM are as follows:

• Beta (raw) = 1.225

• Market risk premium (MRP) = 4.52%

• Risk-free rate = 2.9% Beta was collected from Bloomberg. The market risk premium was derived from Damodaran’s trailing 12-month adjusted market risk premium. The risk-free rate used reflects the current yield on the 30-year U.S. Treasury. Valuation Models After our analysis, we calculated an intrinsic value for Netflix, Inc. of $231.34. We calculated this price using various different valuation models discussed below, but believe the DCF and EP models are the best representation of the value of Netflix due to company having no true peer competitors and not issuing dividends.

Discounted Cash Flow & Economic Profit Model Using the discounted cash flow and economic profit model, we calculated a stock price for Netflix Inc. of $231.34 and an adjusted price of $248.13 which we believe is an accurate representation of the company's intrinsic value. Important assumptions made in this model included the terminal value growth rate of 3.56%, which was derived from the terminal growth rate of NOPLAT in year 2024. Free cash flows carry a negative balance into 2017, but then recover thereafter. Negative free cash flow represents guidance predicting Netflix will spend $6 billion in capital expenditures in the coming year.

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Dividend Discount Model 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.

Relative Valuation We used a relative valuation model to compare Netflix to multiple competitors. These competitors included: Amazon, Best Buy, TELLUS Corporation, Disney, 21st Century Fox, 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 to focus strictly on price and earnings multiples for our relative valuation. From our analysis, we discovered that Netflix is priced very highly compared to its peers, owing to the recent jump in stock price that it experienced. With a forward P/E of 102.4 and a forward PEG of 384, there should be some concern that Netflix is valued very highly, maybe too highly. However, we believe that Netflix’s high valuation is 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

values, as they affect the overall costs of borrowing for the firm and the inputs to free cash flows for the firm, respectively

Cost of Debt vs. Beta We tested the Cost of Debt to Beta to measure how stock price changed in relation to these values. We found that price is more sensitive to Beta, as this reflects how correlated the stock is to overall market movements.

CV Growth of NOPLAT vs. Beta We tested the CV growth of NOPLAT to the effective tax rate to measure how stock price changed in relation to these values. We found that price is more sensitive to Beta, as this reflects how correlated the stock is to overall market movements, and tax rate has relatively little effect on earnings of a firm, and therefore, stock price.

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Netflix (NYSE: NFLX)Key Assumptions of Valuation Model

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

Pre-Tax Cost of Debt 5.79%Beta 1.225Risk-Free Rate 2.95%Equity Risk Premium 4.52%CV Growth of NOPLAT 3.62%CV Growth of EPS 0Marginal Tax Rate 35.00%Effective Tax Rate 0Cost 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 2027ETotal 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 SubscribersRevenues $ 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 $58,106,930 Domestic StreamingTotal Subscribers 39,114 44,738 49,431 54,374 59,540 64,898 70,739 76,398 82,128 87,466 91,840 96,432 101,253 106,316 Total Paying Subscribers 37,698 43,401 47,905 52,743 57,753 62,951 68,617 74,106 79,664 84,842 89,084 93,539 98,216 103,126 Average monthly revenue per paying subscritpion 8.14$ 8.50 9.21 9.30 10.70 11.50 11.90 12.23 12.47 12.69 12.88 13.04 13.21 13.37Revenues 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 $16,548,034 International StreamingTotal Subscribers 18,277 30,024 44,365 62,111 83,850 104,812 125,775 150,930 181,116 217,339 260,807 306,448 360,076 414,087 Total Paying Subscribers 16,778 27,438 41,185 57,453 77,561 96,951 116,342 139,610 167,532 201,038 241,246 283,464 333,070 383,031 Average monthly revenue per paying subscritpion 8.34$ 7.41 7.81 7.89 7.97 8.17 8.27 8.37 8.48 8.60 8.71 8.82 8.93 9.04Revenues 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 $41,558,896 Domestic DVDTotal Subscribers 5,767 4,904 4,114 3,291 2,633 2,106 1,685 - - - - - - - Total Paying Subscribers 5,668 4,787 4,029 3,258 2,607 2,085 1,668 - - - - - - - Average monthly revenue per paying subscritpion 10.29$ 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 2027ERevenues 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 20,337,426Amoritization 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 7,931,596Amoritization of DVD content assets 71,491 79,380 78,952 117,273 151,518 184,473 215,523 249,005 289,654 336,776 389,896 446,424 512,575 581,069Depreciation 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 98,500Marketing 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 5,084,356Technology 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 5,229,624General 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 4,067,485Operating 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 30,828Interest 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 13,953,993Provision 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 4,883,897Net 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 2027EAssetsCash 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 3,308,783Current 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 26,148,119Other 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 1,597,941Total 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 80,694,279Non-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 26,729,188Property and equipment, net 149,875 173,412 250,395 262,915 276,060 289,864 304,357 319,575 335,553 352,331 369,947 388,445 407,867 428,260Other non-current assets 192,981 284,802 341,423 351,820 378,794 461,183 484,927 560,261 622,755 673,551 701,812 781,242 845,748 929,711Total 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 2,033,743Accrued 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 1,452,673Deferred 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 2,905,347Total 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 17,432,079Long-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 16,264,050Other non-current liabilities 59,957 52,099 61,188 205,228 208,820 212,474 216,193 219,976 223,826 227,742 231,728 235,783 239,909 244,108Total 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 45,375,878Total 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 48,112,014Total 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 2016Cash 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 1,772,650Amortization of streaming content assets 2,656,279 3,405,382 4,788,498Amortization of DVD content assets 71,491 79,380 78,952Depreciation and amortization of property, equipment and intangibles 54,028 62,283 57,528Stock-based compensation expense 115,239 124,725 173,675Excess tax benefits from stock-based compensation (89,341) (80,471) (65,121)Other non-cash items 15,282 31,628 40,909Less: 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 46,970Accounts payable 83,812 51,615 32,247Accrued expenses 55,636 48,810 68,706Deferred revenue 58,819 72,135 96,751Other 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 385,300 259,079 282,484Proceeds from maturities of short-term investments 141,950 104,762 140,245Net cash provided by (used in) investing activites (42,866) (179,192) 49,765Cash flows from financing activities:Proceeds from issuance of debt 400,000 1,500,000 1,000,000Issuance costs (7,080) (17,629) (10,700)Proceeds from issuance of common stock 60,544 77,980 36,979Excess tax benefits from stock-based compensation 89,341 80,471 65,121Other financing activities (1,093) (545) 230Net cash provided by financing activities 541,712 1,640,277 1,091,630Effect 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 1,809,330Cash 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 2027ECash 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 9,070,095Adjustments to reconcile net income to net cashAdd: Depreciation 60,470 63,494 66,669 70,002 73,502 77,177 81,036 85,088 89,342 93,809 98,500Add: 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 8,512,665Changes in Working CapitalChange 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 22,618,715Cash from Investing ActivitesAddtions 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 ActivitiesChanges 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 2027ERevenues 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 2027EAssets: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 2027EAssumptionsMarginal 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%

NOPLATEBITANet 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 CapitalOperating 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 AssetsLess: Long-Term Content LiabilitiesPlus: 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 ValueRisk Free Rate 2.95% MV Debt 3,535 Market Risk Premium 4.52% PV Operating Leases 478 Beta 1.23 Total Debt 4,014Cost of Equity 8.49%

Market Cap 82,342Debt Rating BB-Default Spread 2.84% Enterprise Value 86,356Pre-Tax Cost of Debt 5.79%Tax Rate 35.00%After-Tax Cost of Debt 3.76%

Capital WeightsMV 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 ModelFiscal Years Ending Dec. 31 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027ENOPLAT 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 10PV 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 CashLess: 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 ModelFiscal Years Ending Dec. 31 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027ENOPLAT 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 10PV 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 CashLess: 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 Premium231.34$ 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 NOPLAT231.34$ 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$

Beta231.34$ 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 Rate231.34$ 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 2027EEPS 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. 5yrTicker Company Price 2017E 2018E P/E 17 P/E 18 EPS gr. PEG 17 PEG 18AMZN 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 RatiosQuick 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 1.98Current 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 3.02Operating 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 RatiosAsset 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 0.53Ammortization of contracts as % of COGS

Financial Leverage RatiosDebt-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 1.26Interest 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 17.31Cash 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 RatiosProfit 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 0.16Return 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 0.08Return 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 OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases2017 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 LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 64502 60971.7 1 42545 40216.5 1 35501 33558.02 76310 68185.5 2 54811 48975.5 2 37078 33130.43 68456 57819.9 3 58015 49001.2 3 27697 23393.74 66603 53176.0 4 53152 42436.7 4 19804 15811.65 57434 43345.7 5 51844 39126.9 5 14923 11262.56 & beyond 57434 194800.0 6 & beyond 51844 171355.6 6 & beyond 14923 48550.3PV of Minimum Payments 478298.9 PV of Minimum Payments 391112.3 PV of Minimum Payments 165706.4

Forecasted Leases2014 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): 24,437,347Average Time to Maturity (years): 6.18Expected Annual Number of Options Exercised: 3,954,263

Current Average Strike Price: 44.83$ Cost of Equity: 8.49% 3,954Current Stock Price: $192.02 *

0.182017E 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 3,954Average 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 0Expected 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) 428,822 432,776 436,731 440,685 444,639 448,593 452,548 456,502 460,456 464,410 468,365Plus: Shares Issued Through ESOP 3,954 3,954 3,954 3,954 3,954 3,954 3,954 3,954 3,954 3,954 3,954Less: 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 NFLXCurrent Stock Price $192.02Risk Free Rate 2.95%Current Dividend Yield 0.00%Annualized St. Dev. of Stock Returns 43.00%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 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$