This document provides a business valuation of Netflix using three valuation models: the discounted cash flow model, residual operating income model, and market-based valuation model. The DCF model valued Netflix's share price at $67.35, the ROPI model valued it at $205.55, and the market-based model using comparable company PE ratios valued it at $355. While the models produced different values, the DCF model was considered the most accurate as it produced a value closest to the actual market share price of $116.21. The document also discusses Netflix's history, financials, and industry comparisons to support the three valuation analyses.

1. AnnaTrammell Page 1
BusinessValuationforNetflix
NETFLIX
Business Valuation for
Netflix
Anna Trammell
7/24/2016
Netflix isanorganizationthatdistributesDVD’sbymail andstreamsmoviesandoriginaltelevision
showsonline. Thispapervaluatesthe organizationsshare price andequityvalue basedonbalance
sheetandincome statementinformation.

2. AnnaTrammell 2
BusinessValuationforNetflix
NETFLIX
Netflix wasestablishedin1997 by Marc RandolphandReedHastingsinScotts ValleyCalifornia. The
pair metwhile employedatPure Software andhadambitionstosell somethingoverthe internetbut
were perplexedatwhattosell. The ideaforNetflix came toHastingswhenhe receivedabill for
overdue finesoriginatingfromavideorental. Netflix’swebsite firstappearedonApril 14,1998 witha
mere 30 employeesand925 moviesavailableforrental. Theyalsointroducedthe ideaof the monthly
subscriptionconceptinSeptember1999 and eliminatedthe single rental model shortlythereafter. The
companyhas maintainedabusinessmodel of aflatfee permonthwithunlimitedrentalswithoutadue
date,late fees,shippingandhandlingfees,orpertitle rental fees. (Netflix,2016) The entity initiatedan
initial publicofferingonMay 29, 2002 at $15.00 pershare. Netflixpostedaninitial profitaftertheirIPO
offeringin2003 of $6.5 milliondollarsonrevenuesof $272 million. Netflix now developsoriginal series
and playsa significantrole inindependentfilmdistributionandhasestablisheditself asone of the most
successful dot.comcompanies. However,the 2015 year endedwithalowerprofitmarginthan2014
leavingmanytowonderif Netflix hashititsmilestone. Currently,the companyisthe world’sInternet
televisionproviderwith81 millionstreamingmembersinover190 countriesenjoyingmore than125
millionhoursof TV showsandmoviesperday,includingoriginal series,documentariesandfeature
films. Memberscanwatch as muchas theywanton theirInternetconnectedscreens. Theircore
strategyisto grow the streamingmembershipbusinessgloballywithinthe parametersof the
consolidatednetincomeandoperatingsegmentcontributionprofit(loss) targets. (Netflix,2016) The
companycontinuouslyimprovesmembersexperiencebyexpandingstreamingcontentwithfocusona
programmingmix of contentthatdelightstheirmembers. Inaddition,Netflixisperpetuallyenhancing
theiruserinterface andextendingthe streamingservicetomore Internet-connectedscreens. (Netflix,
2016)

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BusinessValuationforNetflix
IndustryDescription
The entertainmentvideoindustryisacompetitiveandeverchangingindustry. Videoisdistributed
througha large marketincludingretailoutlets,internetstreaming,DVDs,andvideoondemand. The
windowforrelease ontothe home viewingmarketisever shortening. Consumersmayhave accessto
variousoptionsinthe marketsoit isa constantchallenge to persuade the consumertochoose Netflix
overthe othercompetitors. There isa slowergrowthpotential forthe overallindustry,accordingto
PwCthe U.S. entertainmentmediaandstreamingisexpectedtoreach720 billionby2020, up fromthe
current$603 billionin2015. (PwC,2016) Chinaisexpectedtooutpace the U.S.for the firsttime by2020
to reach $15.1 billionversus$11 billioninthe U.S. Internetvideo,gaming,andvideostreamingare all
expectedtorise inthe nextfive years.
Comparables—Netflix hasseveral competitorsinthe videostreamingandrental market. Theirmain
competitorisAmazon,offeringvideostreamingservice andretail operations. Amazon’svideooperation
consistsof 23% of theiroverall operationresultinginvideostreamingrevenueof $22,509,000 in total.
Theyalsoprovide a cloudservice toNetflix fortheirmoviesmakingthem acompetitorandavendor.
Accordingto the notesonthe SecuritiesandExchange CommissionEdgarwebsite, theydonotthink
that thiswill interfere withtheircompetitive advantagebecause theyare competingwithadifferent
sectionof the company. (Netflix I.,2016) Anothercomparable iswithOuterwall,Inc.thatofferskiosk
rentalsof videounderthe name of Redbox. Atthispoint,Redbox hasnotenteredthe videostreaming
marketand iscurrentlyexperiencingadecline inrevenue of videorentals. A large segmentof the video
industryisprivatelyheldincludingHBOgo.awhollyownedsubsidiaryof Time Warner,Shotime,owned
by CBS, Hulu,ownedbyFox,and SlingTV,ownedbyDishNetwork. These are some comparisonswith
Amazonand Outerwall,Inc.forreturnonequity,returnonassets,andprofitmargin:

4. AnnaTrammell 4
BusinessValuationforNetflix
NOA,NOPATandWACC
The salesgrowthratio usedwasbasedon the lastthree yearsof growthinthe regionso salesgrowth
was estimatedat20%. The industryitself isfacingadownturninsalesgrowthdue toan increase in
0.00%
1.00%
2.00%
3.00%
Netflix Amazon Outerwall
ROA 1.20% 0.91% 2.60%
ReturnonAssets
Return on Assets
0.00%
2.00%
4.00%
6.00%
Netflix Amazon Outerwall
ROE 5.20% 1.02% 2.14%
ReturnonEquity
Return on Equity
0.00%
1.00%
2.00%
3.00%
Netflix Amazon Outerwal
l
Gross Profit 1.81% 0.61% 2.01%
AxisTitle
Gross Profit

5. AnnaTrammell 5
BusinessValuationforNetflix
technologycostsandcompetition. Itisdifficulttotrackcompetitionbecause mostof the companiesare
privatelyowned. The terminal periodgrowthwascalculatedat1%.Net OperatingAssets(NOA) was
calculatedfromthe balance sheetusingthe formulafromnetassetslessnetliabilitiestoarrive at
$2,284,073. NetOperatingProfitafterTax (NOPAT) wascalculatedfromthe income statement,using
netoperatingincome lessthe tax provisionlessthe interestexpense,netof tax to arrive at $282,210.50
The current income tax rate is 14% for2015 because of researchand developmenttax creditstaken.
The Weightedaverage costof capital (WACC) is 7.86% calculatedfromthe currentmarketcap of $38.95
millionandcurrentlongtermdebtof $2,371,362, the riskfree rate usedwas 1.67% andmarket
premiumof 5.75% per KPMG. (KPMG,2016)
DCF Model
The DiscountedCashFlowModel attaches a value toa companybasedonestimatedfree cashflowsfor
the future. Underthe DCF model cashisoftenviewedasthe ultimate source of value forinvestors. The
value of the firmis construedasbeingfree cashflowsfromoperatingactivitiesonly,financingactivities
are notincluded. (Easton,2015). To arrive at the firmvalue,the horizonperiodwasdocumentedfor
fouryears. Aspreviouslystated,the NOPATandNOA were derivedfromthe balance sheetandincome
statement. The future horizonperiod,usedtocalculate the presentfreecashflowswasbasedonsales
growthof 23%, netoperatingprofitmargin(NOPM) wascalculatedfromthe NOPATderivedfromsales
growthdividedbythe derivedNOPAT. Netoperatingassetturnover(NOAT) wascalculatedbydividing
salesbyNOA. The horizonperiodwas establishedforfouryears,2016-2019. Afterthe differencein
NOA was noted,the presentvalue forthe fourhorizonyearswasaddedtothe presentvalue of the
terminal horizonyear,resultinginthe total firmvalue. The total firmvalue wasthenreducedbythe net
nonoperatingassets. The resultingfigure isthe total equityvalueof the firm. The total equityvalue of
the firmis dividedbythe sharesoutstanding,finallyarrivingatthe share price. The disadvantage of the

6. AnnaTrammell 6
BusinessValuationforNetflix
DCF model isthatit onlyincludesfree cashflowsanddoesnotinclude anyreceivablesorpayables.
However,itisa more accurate value overmarketvalue because itdoesnotinclude shareholder
speculations. The resultsof the DCFmodel are the closestto the actual share value. The total firm
value equatesto$2,908,761 lessnetnonoperatingassetsof 60647 and dividedbysharesoutstandingof
42290 milliontoarrive at share value of $67.35 whichisconsiderablylessthanthe marketvalue. Itis
interestingtonote that the share value hasdroppedto86.67. Thismay be viewedasamarket
correctionto adjustthe marketprice to the share price basedon free cashflows. The othermodel used
to calculate share value isthe Residual OperatingIncome Model (ROPI).
The ROPI model usesboththe income statementandthe balance sheettoarrive at firmandshare
value. The rationale forusingthe ROPImodel isthatbookvalue providesananchorto our valuation
that isthenaugmentedbasedonearnings. (Easton,2015) ROPIiscalculatedbymultiplyingthe
beginningof the periodnetoperatingassetsbythe weightedaverage costof capital. The resultis
subtractedfromNOPAT,toarrive at the ROPIvalue. Thisvalue isextendedforthe horizonperiodwhich
isthendiscountedandforecasted. The presentvalueterminalperiodROPIisthenaddedtothe horizon
periodROPIandNOA. The total firmvalue isreducedbythe netnonoperatingassetstoarrive at the
total equityvalue. The total equityvalue isdividedbythe numberof sharestoarrive at the share value.
The ROPI discountedforpresentvaluewascalculatedat$930,757 and terminal presentvalueat
$5,538,393, withNOA at $2,284,073 addedtogetherfora total firmvalue of $8,753,222 lessnet
nonoperatingassetsof 60647 yieldingtotal equityvalueof $8,692,575 dividedbysharesoutstandingof
42290 milliontoconclude ashare price of $205.55 whichis overthe marketshare of $114.66 by 79%.
The Market-basedValuationmethodisthe final methodof valuationunderconsideration. Thismethod
isconsideredsimpletouse andisbasedon comparablesinthe industry. Amazonisagood comparable
because theirincome basedonvideostreamingissimilar,grossprofit,ROA,andROE. Outerwall Inc.,

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BusinessValuationforNetflix
Redbox,isa smallercompanyandiscurrentlyexperiencingareductioninprofitsandisdownsizingsome
of itsoperations. Ichose the PE ratioto determine equityandshare costbecause itisbasedon earnings
rather thananothermarketcomparable. The balance sheetdoesnotreflectall of the factorsto
determine avalidshare andequityvalue. The PEratio determinedbythe NASDAQwebpageislistedas
follows: Netflix 97,Outerwall,Inc.5.35, andAmazon17.25. The calculatedequityvalue basedon
stockholderequityforNetflix is$1,324,809. The PE ratiofor the industrycomparablesIchose is 11.31
whichcalculatedthe equityvalue of $14,986,590. share value isthencalculatedto$355 dollarsa share
whichisovervaluedcomparedtothe currentprice of $116.21 as of December31, 2015.
The value of technologystocksisa biginvestmentchallengeforthe corporate andretail investor. It
remainsdifficulttofindcomparablesandthe model valuationsvaryconsiderably. The three modelsare
the DCF model,the ROPImodel,andthe market-basedvaluationmodel. The DCFmodel provedto
make the most accurate valuationat$67.35 centsa share whichgivesatotal firmvaluationof
$2,908,761. The percentdifferenceiscalculatedat42%. The ROPImodel givesahighervaluationof
$205.55 value pershare andtotal firmvalue of $8,753,222. The market-basedvaluationbasedonthe
PE ratio gave the highestratioperhapsbecause Netflix PEratiois97.6 in comparisontoan industry
average of 11.31. The market value basedonthe industryaverage is$14,983,590. Share value then
figuresinat $355 dollarspershare.

8. AnnaTrammell 8
BusinessValuationforNetflix
DCF Model
Appendix A
DCF Model 2015 2016 2017 2018 2019 Terminal
Perios
Sales $
6,779,511.
00
$
8,135,413.
20
$
9,762,495.8
4
$
11,714,995
.01
$
14,057,994.
01
$
14,198,573.
95
NOPAT $
282,210.50
$
338,652.60
$
406,383.12
$
487,659.74
$
585,191.69
$
591,043.61
NOA $
2,284,073.
00
$
2,740,887.
60
$
3,289,065.1
2
$
3,946,878.
14
$
4,736,253.7
7
$
4,783,616.3
1
Difference in
NOA
$
456,814.60
$
548,177.52
$
657,813.02
$
789,375.63
$
47,362.54
PV of NOA
Horizon
$423,525.5
0
$507,253.6
6
$609,004.6
6
$730,262.8
7
$
690,416.00
Total
horizonPV
$2,270,046
.68
$436,017.9
4
$470,288.9
5
$564,625.1
2
$677,046.9
8
$638,713.8
8
Total Term
PV
$638,713.8
8
Total Firm
Value
$
2,908,760.
56
LessNNO 60647
Total Equity
Value
$
2,848,113.
56
/Shares
Outstanding
$
42,290.00
Share Price $
67.35
Stock Price
per Yahoo
116.21
% Difference 42%
Sales
Growth
20.0
0%
NOPM 4.16
%
NOAT 2.97
WACC 7.86
%

9. AnnaTrammell 9
BusinessValuationforNetflix
ROPIModel
Inputs 2015
Colu
mn3 2016 2017 2018 2019
Term
Period
Sales
$
6,779,511.
00
$
8,338,798.
53
$
10,256,722
.19
$
12,615,768
.30
$
15,517,395
.00
$
15,672,568.
95
NOPAT
$
282,210.50
$
347,118.92
$
426,956.27
$
525,156.21
$
645,942.13
$
652,401.56
NOA
$
2,284,073.
00
$
2,809,409.
79
$
3,455,574.
04
$
4,250,356.
07
$
5,227,937.
97
$
5,280,217.3
5
NOA *
WACC
$
179,428.70
$
220,697.30
$
271,457.68
$
333,892.95
$
410,688.33
PV of NOA
Horizon
$166,353.3
3
$204,322.0
2
$251,192.1
7
$308,889.2
2
$
5,986,710.2
9
Total
horizonPV
$930,756.7
4
$175,628.2
4
$189,432.6
1
$232,887.2
4
$286,379.7
7
$5,538,392.
72
Total Term
PV
$5,538,392
.72
NOA
$2,284,073
.00
Total Firm
Value
$8,753,222
.46
LessNNO 60647
Total
Equity
Value
$
8,692,575.
46
/Shares
Outstandin
g
$
42,290.00
Share Price
$
205.55

10. AnnaTrammell 10
BusinessValuationforNetflix
Bibliography
Easton,M. S. (2015). Financial StatementAnalysis&Valuation. Cambridge BusinessPublishers.
KPMG. (2016, April 12). EquityMarketRisk Premium--Research Summary. Retrievedfrom
https://www.kpmg.com:
https://www.kpmg.com/NL/nl/IssuesAndInsights/ArticlesPublications/Documents/PDF/Transact
ions-Restructuring/MRP-Summary-12-april-2016.pdf
Netflix.(2016). https://en.wikipedia.org/wiki/Netflix. Retrievedfromhttps://en.wikipedia.org:
https://en.wikipedia.org/wiki/Netflix
Netflix,I.(2016, April 20). https://www.sec.gov/archives/edgar. Retrievedfromhttps://www.sec.gov:
https://www.sec.gov/Archives/edgar/data/1065280/000106528016000057/nflx-
33116x10qxdoc.htm#s3E4A553A69EE6074C2539F0C1DA82BCC
PwC.(2016, june 2016). PwC'sEntertainment& Media OutlookForecastsU.S.Industry Spending to
Reach $720 Billion by 2020. Retrievedfromwww.prnewswire:
http://www.prnewswire.com/news-releases/pwcs-entertainment--media-outlook-forecasts-us-
industry-spending-to-reach-720-billion-by-2020-300281287.html