Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie College of Business Jacob Kammerer [jacob-kammerer@uiowa.edu] Netflix, Inc. (NFLX) April 20, 2021 Communication Services – Entertainment Stock Rating Buy

Investment Thesis Target Price $605-610 We recommend a BUY rating on Netflix, Inc., driven by low cost of content per subscriber and a projected 35.3% compound annual growth rate in memberships in the Asia-Pacific region. Netflix is the dominant video streaming firm, boasting the most paid memberships worldwide. We believe Netflix will experience beneficial scaled economics given the vast scale of its operations. We project an upside of 11.0%, and recommend a buy rating. Drivers of Thesis • Projected 35.3% compound annual growth rate in memberships in the Asia-

Pacific region, driven by low subscriber penetration rates per capita. • Strong scaled economics driving down costs due to Netflix’s vast scale, with

a projected 90% increase in gross margin between 2020 and 2030.

• Netflix has the most subscribers and distributes content at near-zero marginal cost, so Netflix can simultaneously be the highest bidder for content and achieve the lowest content cost per subscriber.

Risks to Thesis • Increased competition cannibalizing Netflix’s subscriber growth, potentially

lowering our projected 15.6% compound annual growth in total revenue. • Lower than expected revenue per membership growth, especially in Latin

America where we project a 3.0% compound annual growth rate. • High content acquisition costs as a result of increased competition,

lowering our projected 90% increase in gross margin.

Henry Fund DCF $608 Relative PEG 2021 $573 Henry Fund DDM $509 Relative P/E 2021 $331 Price Data Current Price $549.57 52wk Range $393.60 – 593.29 Consensus 1yr Target $619.43 Key Statistics Market Cap (B) $243.4 Shares Outstanding (M) 442.9 Institutional Ownership 81.5% Beta 0.83 Dividend Yield 0.0% Price/Earnings (TTM) 90.4 Price/Earnings (FY1) 50.8 Price/Sales (TTM) 10.0 Profitability Gross Margin 38.9% Operating Margin 10.6% Net Margin 18.3% Return on Equity (TTM) 23.9%

Earnings Estimates Year 2018 2019 2020 2021E 2022E 2023E EPS

HF est. $2.78

$4.26

$6.26

$10.10 $9.86

$13.04 $12.71

$17.12 $16.99

growth 115.5% 53.2% 46.9% 57.5% 28.9% 33.7% Source: FactSet [1], Yahoo! Finance [2]

12 Month Performance Company Description

Netflix is an international entertainment firm that enables members to watch as much video content as they want, where they want, and when they want. Netflix operates the popular Netflix application, which can be accessed on any platform with an internet connection. Netflix derives 99% of its revenues from streaming services, and boasts a paying membership base of 204 million users.[3] Netflix is expected to maintain their streaming dominance moving forward, even given the influx of streaming competitors.

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COMPANY DESCRIPTION

Netflix is an streaming video on demand (SVOD) company with operations worldwide. Its mission is to “entertain the world.” [5] It operates via two distinct segments: streaming services and DVD-by-mail services. It derives 99% of its revenues from streaming, with the remaining 1% of revenue coming from DVD-by-mail services. Netflix is available in every country except China, North Korea, Syria, and Crimea, due to a challenging regulatory environment. Current company initiatives include “growing [its] ecosystem of users and rapid innovation.” [6]

Revenues have been broken down geographically, below. The most profitable region is the U.S. & Canada (UCAN), where the average revenue per membership is much higher relative to other regions. The UCAN has the largest subscriber base, comprising 34% of total subscribers in 2020. We expect lower relative growth in monthly memberships in the UCAN region in years to come due to market saturation, with the highest growth in the Asia-Pacific (APAC) and Latin America (LATAM) regions.

Source: NFLX 10-K [7]

DVD-by-mail Service

Netflix’s DVD-by-mail segment is the smaller of Netflix’s two operating segments, and accounts for 1% of total revenue. This service is only offered in the United States, and is a remnant of its past business model. “In 1999, Netflix began offering an online subscription service through the Internet. Subscribers chose movie and television titles from the Netflix website; the shows were then mailed to customers in the form of DVDs.” [8] Revenues from this segment consists of membership fees associated with subscribing to the Netflix DVD-by-mail

program. This was Netflix’s primary revenue driver prior to the mass adoption of streaming, but its revenue share has continuously declined since 2011. We forecast continued decline of 20% in this revenue segment, based on year-over-year decline in the previous three years. Netflix does not provide any additional details on segment profitability versus cost or when they plan to fully discontinue the segment. As of FYE 2019, “over two million members in the U.S. subscribe to [the] DVD-by-mail legacy service.” [9]

Source: NFLX 10-K, [10] Henry Fund Model

Streaming Service

Streaming services account for 99% of Netflix’s total revenue. This service is offered worldwide, and can be used by anyone with a broadband internet connection of at least 0.5 Mbps. Streaming revenues are dependent upon two factors: total average paying memberships and monthly revenue per paying membership.

Average Paying Memberships

Netflix boasts the most paying memberships of any streaming platform, with an estimated 204 million persons subscribing to its platform as of FYE 2020.[11] This represents membership growth of 21.9% year-over-year from 2019 to 2020. We expect robust membership growth in the next five years, especially in the APAC and EMEA regions, where we project a 35.1% and 16.5% CAGR, respectively. We expect lower growth in the UCAN region, due to market saturation and limited growth opportunity.

APM (M) 2020 2021E 2022E 2023E 2024E UCAN 71.7 76.4 80.2 83.6 86.5 EMEA 60.4 77.0 92.5 106.3 119.1 LATAM 35.3 41.5 47.1 52.3 57.0 APAC 21.7 32.5 46.3 62.5 79.7

Source: NFLX 10-K, [12] Henry Fund Model

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The graph below plots growth in memberships in the APAC region versus growth in total revenue. The APAC and LATAM regions remain largely untapped, with low membership penetration levels relative to the total population. However, LATAM countries have smaller library content sizes so we expect lower growth in memberships due to less engagement. We expect membership growth in the APAC and EMEA markets will drive revenues over our forecast horizon.

Source: NFLX 10-K, [13] Henry Fund Model

Monthly Revenue per Paying Membership

Netflix boasts the highest revenue per membership of any SVOD platform, with a global average revenue per membership of $10.91.[14] Revenue per membership varies significantly by region, as shown in the table below. We expect membership fees to increase most significantly in the LATAM and EMEA regions, which in turn will boost revenue per paying membership. Currently, revenue per membership in the UCAN is much larger than the other three regions. As such, we expect minimal growth in membership fees within this region, and expect fees to keep pace with inflation. We forecast low terminal growth in average revenue per membership of just 1.5% for each region, given that Netflix has limited ability to increase price drastically due to high elasticity of demand. These terminal growth values simply capture the effects of inflation.

RPM ($) 2020 2021E 2022E 2023E 2024E UCAN $13.32 $13.72 $13.93 $14.13 $14.35 EMEA 10.72 11.04 11.32 11.54 11.72 LATAM 7.45 7.75 8.02 8.26 8.47 APAC 9.12 9.21 9.40 9.40 9.49

Source: NFLX 10-K, [15] Henry Fund Model

In the U.S., there are three distinct subscription plans that determine membership fees: basic, standard, and premium. Each subscription comes with unlimited access to movies and TV shows on any device. However, the choice of subscription plan directly effects which additional features are available. The table below shows the monthly cost for a U.S. membership, and the total number of screens that can play Netflix content simultaneously. Netflix does not offer any additional information on which subscription plans are most popular. Further analysis of competitors pricing plans can be found under the “markets and competition” subheading.

Basic Standard Premium Monthly Cost $8.99 $13.99 $17.99 # of screens 1 2 4 # of devices with downloads

1 2 4

Source: Netflix Plans and Pricing [16]

Total Revenue

Streaming service revenue has seen tremendous growth over the past eight years, once accounting for only “60.5% of [Netflix’s] total revenues in 2012.” [17] The graph below shows total revenue by region. We expect revenue in the EMEA region to overtake U.S. revenues, especially as broadband internet connectivity increases in this area (this is covered more fully in digital trends, below). We also expect APAC revenues to overtake LATAM revenues, with high growth in the India and Indonesia markets. The primary driver of this is a push toward producing original content in languages native to APAC countries.

Source: NFLX 10-K,[18] Henry Fund Model Projections

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Cost Structure Analysis

We forecasted the majority of Netflix’s expenses as a percentage of sales, with the exception of cost of revenue. We forecasted cost of revenue based on beginning content assets and content amortization, since “amortization of content assets makes up the majority of cost of revenues.” [19] The underlying assumption is that accumulated content amortization cannot exceed content expenditures. Below, the graph shows the historical and forecasted cost of revenue. We expect Netflix will experience economies of scale while growing operations, with cost of revenue (as a percentage of sales) gradually decreasing and settling at 44.9% of sales.

Source: NFLX 10-K [20]

We expect general & administrative (G&A) and marketing expenses to decrease over time, as Netflix experiences economies of scale while growing revenues. However, we technology & development (T&D) expenses to increase slightly due to their integral nature in helping Netflix produce engaging and relevant content. Expenses are summarized, below.

Expenses (% sales)

2020 2021E 2022E 2023E

G&A 4.3% 4.0% 3.8% 3.8% T&D 7.3 7.0 7.0 7.0 Marketing 8.9 8.9 8.8 8.5

Source: NFLX 10-K, [21] Henry Fund Model

Netflix has increased gross and net margins, year-over-year, from 2016-2020. We expect gross and net margins will continue to increase over the next ten years, driven by low cost of content relative to its subscriber base. We project an increase in gross and net margins of 6.9% and 11.5% CAGR, respectively.

Source: NFLX 10-K, [22] Henry Fund Model

Target Market Analysis

Netflix has no primary target market, and markets its services to anyone who desires ease-of-access to entertainment. Netflix plans to continue expanding into untapped markets as broadband connectivity increases. The graph below shows content library size by country. We expect Netflix to continue growing its library size in the EMEA and APAC regions, where growth potential is highest due to low membership penetration levels.

Source: Comparitech [23]

In recent years Netflix has made a tremendous effort to produce content that engages a wide array of audience groups, regardless of age, gender, sexual orientation, or culture. Netflix has also made efforts to produce content in other languages, and content that is inclusive of a variety of cultures. The company launched “the Lunar New Year Premium Collection” [24] in January 2021, which “showcases mandarin-language premium titles.”[24] Netflix has strategically positioned themselves to continue growing organically in emerging markets.

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Debt Maturity Analysis

Netflix has taken on a large amount debt in recent years. This has had benefits such as lowering their weighted average cost of capital, but it has also required increasing dependence on revenue growth and generating free cash flow. We do not expect Netflix will need to refinance debt in the next 10 years due to their positive free cash flows. Management does not give any guidance on target capital structure, but historically has maintained no more than 10% debt relative to total enterprise value. We expect this to remain the case, barring any materially adverse effects. In January 2021, Netflix was upgraded by S&P “to BB+ on strong video streaming trends and positive free cash flow.”[25] This rating has been trending upward over the past year, with Netflix’s credit rating being raised twice.

Five-Year Debt Maturity Schedule Fiscal Year Coupon (%) Payment ($mil) 2022 5.500% $700 2023 - 0 2024 5.750 400 2025 4.439 2,072 2026 4.375 1,110 Thereafter 4.736 13,937 Total 4.736 $18,303

Source: NFLX 10-K [26]

RECENT DEVELOPMENTS

Latest Earnings Report

Netflix reported 2021 Q1 earnings on April 20, 2021. It beat analyst expectations in revenue growth and EPS, but fell below estimates for subscriber additions. Specifically, Netflix reported the following metrics relative to analyst expectations:

Expectation Reported EPS 3.75 2.97 Revenue 7.1 B 7.2 B Subscriber additions 6.2 M 4.0 M

Source: CNBC Netflix Earnings Report [27]

Netflix stock fell 8.7% in after-hours trading on April 20th [28] in reaction to the company reporting significantly lower subscriber additions. Management indicated the reason for the slowdown in membership growth was from “a lighter content slate in the first half of this year, due to Covid-19 production delays.” [27] We are not worried by the

lower than expected subscriber growth. Netflix is maturing as a firm, and lower growth in total paying memberships is to be expected. Q1 revenues fell in line with analyst expectations. Netflix beat EPS expectations by 26%, likely due to lower than expected costs.

Looking forward, management gives the following guidance: [27]

• 17 billion in content spending this year • Higher content release in second half of 2021 • Initiating a share buyback program in 2021 • Continued testing of password crackdown

We expect EPS to dramatically increase in the next three years, given that Netflix is initiating a share buyback program. Netflix is maturing as a firm, and has the profitability to return wealth to shareholders via buybacks. We also expect restrictions will be eased such that Netflix can fulfill its goal of spending 17 billion on content. This will likely bolster membership growth in the second half of the year, and enable Netflix to achieve a projected 226 million memberships by FYE 2021.

COVID-19 Impact

Netflix has benefited from the Covid-19 pandemic; and that may be the understatement of the year. It achieved positive free cash flow for the first time in its 2020 fiscal year, and added 36.5 million subscribers for a total year-over-year growth of 21.9%. The company did this while simultaneously “raising the prices on its standard and premium plans for U.S. customers.”[29] This has only further solidified its dominance in streaming.

Netflix will likely retain this user base moving forward. We have factored this assumption into our model through continuous subscriber growth. We do not expect a mass exodus from the platform even when restrictions are lifted, and see a permanent change in the way people consume video media. However, we forecast conservative growth in memberships in 2021 due to the easing of Covid-19 restrictions. We expect people will spend less time at home, whether it be due to work or outdoor leisure activities, which will decrease time spent streaming. This has the possibility of eating into Netflix’s subscriber base, as pent up demand results in a shift in budget allocation from streaming to travel. However, we see this as unlikely given that streaming is seen a staple.

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Password Sharing Crackdown

In early March, Netflix said it has “started testing a feature that could prod users who are borrowing a password from someone outside their household to buy a subscription.” [30] Password sharing has been a common practice among friends and extended family for years. This feature attempts to curb this behavior by prompting users to verify the account via an email or text code if the company detects the person is not the account owner. If Netflix decides to implement this feature universally, it could yield large organic subscription growth for Netflix in years to come.

We expect Netflix will roll out this system on a broader basis, assuming this system is a successful deterrent to password sharing. This will help boost average paying memberships, and also ensure better security measures are in place. However, it is important to note that we do not think the company will risk its current user base through a heavily-enforced password crackdown; they merely are reminding users of a breach in the terms of use agreement.

INDUSTRY TRENDS

The mass adoption of streaming has changed how people consume video media. From cord cutting to increased broadband connection, people can stream from almost anywhere and at any time. And the adoption of mobile technology has only further solidified this shift in consumption. It gives consumers the ability to consume media where they want, when they want. This trend has enabled firms such as Netflix to capture tremendous market share, and grow operations aggressively.

Cord Cutting

Pay TV has experienced what is known as the “cord cutting” trend over the past 10-12 years. This correlates with when Netflix introduced video streaming, which provided an alternative to basic cable television. Cord cutting has directly benefited Netflix, whose service is much cheaper than traditional cable television. The graph, below, shows DirecTV’s total subscribers from FYE 2014 through 2020. Subscriber growth has trended downward, as internet connectivity speeds increase and more people desire the convenience of streaming. We expect a continued trend in cord cutting, and expect this is one way Netflix will continue to grow its membership base.

Source: Statista [31]

Broadband Access

Broadband access is essential to streaming video content via Netflix. A minimum broadband connectivity speed of 0.5 Mbps is required to stream Netflix’s content. As such, total broadband penetration is one of the foremost indicators of potential growth. The graph below shows mobile broadband subscriptions worldwide, from 2015 to 2020. Broadband subscriptions have rapidly been increasing as this technology becomes widely available to most of the world population. However, this growth has slowed in the past four years, as we reach the upper bound of potential broadband subscribers.

Source: Statista [32]

Broadband connection speed is a crucial factor in the quality of video streaming. Higher connection speeds allow for seamless streaming capability, which enhances viewer experience. As such, we have broken down fixed broadband connection speeds by select country in the table below, with data presented as of March 2021.

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Country Connection Speed (Mbps) Thailand 230.6 Romania 210.8 France 193.5 South Korea 185.0 U.S. 182.7 Chile 170.0 China 168.0

Source: SpeedTest Global Index [33]

Original Content

Original content is any content that is exclusive to a platform. “Netflix has been releasing movies and TV Series under the label “Netflix Original” since 2013.” [34] This is an example of original content, which can only be watched on the Netflix platform. Netflix’s debut of original content has proved to be a master-stroke in forward thinking; as content contracts expire and the licensed content is returned to its rightful owner, Netflix is left with a wonderful library of original content. Below, the table shows Netflix content spending and year-over-year growth in spending. This spending goes toward producing original content, which in turn retains and grows Netflix’s large userbase.

2017 2018 2019 2020 Content Spending

$8.9 B $12.0 B $15.3 B $17.3 B

YoY growth 34.8% 27.5% 13.1%

Source: Statista [35]

Firms saw the success of original content and tried to replicate it. Amazon began debuting original content in 2015, and now almost every major platform produces some form original content. This has changed the landscape of streaming, enabling firms to retain a loyal customer base due to the various shows and movies they simply cannot find anywhere else. We expect Netflix to remain the industry leader in original content, because it spends so aggressively in this area. Netflix also has access to large amounts of user data, which can be used to generate engaging content.

Higher Screen Times

On average, adults in the U.S. spent 3.75 hours browsing or in apps on their smartphone per day. Furthermore, total screen time among all digital devices increased to 7.5

hours in the U.S. during the pandemic. These higher screen times have directly translated into higher revenues for firms within the video streaming space. Screen times are expected to continue trending higher as we enmesh ourselves more fully with the digital world. We believe the companies that are most advantaged by this trend are streaming platforms. Netflix, Disney, Amazon, AT&T, and NBCUniversal are all poised to continue growing streaming revenues as a result of our digital appetites.

The graph below shows the trend in time spent with traditional media versus digital media in the U.S. The term “traditional media” refers to media such as television, radio, newspapers, and magazines. This trend toward greater digitalization is likely here to stay, and will continue growing rapidly both the U.S. and abroad. This large increase in screen time provides digital advertising firms with the opportunity to reach an audience that numbers in the billions, and take full advantage of monetizing this trend.

Source: eMarketer [36]

Passion Brand

Netflix has followed many successful predecessors in developing what is known as a passion brand. A passion brand focuses on doing one or two things well, rather than attempting to perfect multiple, different types of operations. Examples include “Starbucks, not 7-Eleven; Southwest, not United; HBO, not Dish.” [37] This focus has enabled Netflix to remain the leader in streaming, and continually produce content that is critically-acclaimed, popular, and highly engaging. We expect Netflix will keep this as its central focus in the coming years, and would see any deviation from this vision as an indication of poor future outlook.

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MARKETS AND COMPETITION

The entertainment industry is filled with large companies that vie for viewer attention and interaction. This is especially true of video streaming, with the advent of the so-called “streaming wars”. In recent years, large companies have observed the success of Netflix and debuted their own streaming platforms. This has come at a cost to Netflix, who previously enjoyed unfettered control of the streaming market. Currently, the main players within this market include Netflix, Disney (Disney+ and Hulu), and Amazon Prime. Along with these main players, other notable participants include AT&T (HBO Max), Comcast (NBCUniversal’s Peacock), Apple TV+, Google (YouTube TV), and ViacomCBS (Pararmount+).

The market dominance these select few companies is expected moving forward, especially for Netflix. The company has been very active in producing and acquiring original content since 2013, giving it an advantage as other companies try to simultaneously create new content and retrieve content that was licensed. However, we expect smaller platforms like HBO Max to gain a large subscriber base due to its broad library of legacy content.

The graphic below shows the percentage of consumers surveyed who purchased streaming services from these providers, as of April 2020. Netflix exhibits clear dominance in membership penetration, and is only rivaled in size by Amazon Prime and the Disney suite of products (Hulu and Disney+). It is important to note this survey only included U.S. consumers. Abroad, large SVOD providers include Tencent Video, iQIYI, and Youku, which boast a 120M, 119M, and 90M subscribers, respectively, as of FYE 2020. We do not use these companies in our comparison, since they derive a large portion of revenue from China.

Source: Statista [38]

Peer Comparisons

The companies we have chosen to focus on for peer comparison all operate video streaming platforms, and together account for a significant portion of market share. Below, each of these companies is compared via total subscribers, subscription pricing tier, and 2020 content spending.

Total Subscribers

Ticker 2019 Subscribers

2020 Subscribers

YoY growth

NFLX 152 M 204 M 34% AMZN 75 150 100 DIS 33 165 400 CMCSA - 33 - GOOGL 15 30 100 VIAC 8 18 124 T 8 17 115 AAPL - 10 -

Source: FIPP, Company Annual/Quarterly Filings [39]

NFLX is best positioned in terms of total subscribers. NFLX has the advantage of being the first mover, and is the most mature of the streaming companies in terms of years providing streaming services. However, DIS and T are both exhibiting tremendous growth in subscribers. This is a result of these platforms being in their early-growth years; we expect growth in both to level off as they raise prices and reach a point of user saturation in the United States. These companies are still developing their subscriber base, do not expect these platforms will experience any meaningful saturation for the next couple years.

The key to future subscriber growth lies internationally, and especially in the Asia-Pacific and Latin America regions. We believe NFLX is best positioned to maintain and grow subscribers, even with the fierce competition and higher competitor subscription growth. This is due to a push toward producing international content, and an active presence in many of these markets. NFLX also has the ability to spend almost twice as much on content as its competitors, due to its large subscriber base, which helps solidify its dominance within the industry. We expect NFLX will not be surpassed by any of its peers in total subscribers over our projection period.

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Subscription Pricing Tiers

Ticker Basic Plan Cost Ad Supported? YouTube TV $64.99 No HBO Max 14.99 No Netflix 8.99 No Prime Video 8.99 No Disney+ 7.99 No Hulu 5.99 Yes Paramount+ 5.99 Yes Peacock 4.99 Yes Apple TV+ 4.99 No

Source: Platform Pricing Plans [40]

The table above shows the cost of the most basic subscription plan that each service offers, as of April 2021. The table also indicates which platforms operate an ad-supported service built upon the basic plan. The competitors most similar to Netflix will offer all content for a fixed monthly cost, with no ad-supported streaming. Given that Netflix is the largest player within the streaming industry, they can command one of the highest basic plan costs. We Netflix will remain a price-setter within the industry, and smaller streaming companies will follow.

2020 Content Expenditures

Ticker Estimated Expenditure Percent Netflix Netflix 16 B 100% Prime Video 7 44 Apple TV+ 6 38 Hulu 3 19 Disney+ 1.75 11 HBO Max 1.5 9 Peacock 1 6

Source: Forbes [41]

Netflix spends much more on content than its peers. This is illustrated in the table above, which shows 2020 estimated expenditures and the expenditures as a percent of Netflix’s total expenditures. Content expenditure can be seen as an investment, which will both retain membership base and attract new subscribers. Netflix’s high content spending is an attempt to bolster its content library, as licensing agreements for past content lapse and competitors retain the rights to stream content. We expect Netflix will remain the highest spender on content, since it has the ability to spend much more on content given its large subscriber base.

A Comparison Story

Lastly, we feel the streaming industry is experiencing what many industries have experienced in the past:

1. The success of a select few, first mover companies 2. An onslaught of new competitors 3. Merger-mania and consolidation

We feel that this is important to understand because history often repeats itself. Ford debuted the first, large-scale production of its Model-T. Soon afterward, many companies were trying to replicate this success, each with its own style, filling a niche within the market. After it became obvious that not all of these companies would become profitable, due to an upper-bound on total market size, the industry experienced large consolidation. What remained: the largest and most adaptable within the industry.

We feel the same will be true within the streaming industry. Netflix has a first mover advantage, and a proven ability to be adaptable. It has grown organically for years with no merger or acquisition activity, and has an uncanny ability to mirror competitor success. Even if Netflix will need to acquire competing firms, it will have the financial means to do so and will maintain its dominance.

COMPARABLE ESG ANALYSIS

The chart below shows ESG scores of Netflix’s major streaming competitors. We chose to focus on DIS, T, CMCSA, and AMZN since they all operate competitive streaming platforms.

Ticker Environment Social Governance NFLX 0.2 6.8 10.4 DIS 0.0 8.1 8.1 T 1.9 10.9 6.3 CMCSA 1.2 9.3 8.9 AMZN 5.1 12.5 9.8

Source: FactSet [42]

Environmental

Netflix has a low environmental score relative to peers, which bodes well for the company. This low score is driven in large part by the low energy usage required of its business model: energy consumption associated with operating corporate offices, data centers, and travel associated with filming. Netflix utilizes Amazon servers as

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the backbone of its streaming platform, which helps keep its environmental score low and in turn artificially elevates Amazon’s environmental score.

Netflix currently has a number of initiatives in place to lower its environment score, and as such decrease its effects on our climate. The primary company initiatives are:

1. Reducing emission by 45% in 2030 [43] 2. Investing in the regeneration of critical natural

ecosystems [43] 3. Fully neutralizing emissions that can’t be avoided

internally by investing in carbon prevention projects [43]

We believe these initiatives will help position Netflix to operate more efficiently, from a climate change perspective, and help bolster public perception of the company.

Social & Governance

Netflix has a relatively high governance score of 10 [44], driven by limited shareholder rights of lesser-stake holders in the company. We expect the company to take initiatives toward creating a more equitable and transparent governance structure. Netflix has a low social score, in part due to diversity initiatives and limited company controversy.

RISKS TO GROWTH

The primary risks facing Netflix are increased competition and streaming saturation. Netflix no longer operates unperturbed and with limited competition; as indicated above, Netflix is facing fierce competition from a variety of large companies, all of whom are well-equipped to capture streaming market share. Netflix also is dealing with the effects of limited growth prospects in the U.S. and Canada, which is showing signs of market saturation. These two issues must be closely monitored in the coming months and years, and any acquisitions within the streaming space must be closely monitored.

Streaming Wars

The streaming wars are in full swing, and it is not to the benefit of the first mover: Netflix. The company has maintained its competitive edge as other companies debut streaming platforms, and Netflix has even grown its user

base in the process, but there is an upper bound to the amount of money consumers are willing to allocate toward streaming entertainment. We do not anticipate Netflix will be adversely effected, since the company spends about twice as much on content as its competitors. However, these competitors have legacy content, such as cult classics like “Friends” or “The Office”, and will grow memberships as a result. We do not anticipate that Netflix will engage in any acquisition activity to drive growth.

Streaming Saturation

Movie and television streaming has seen explosive growth since first gaining wide adoption in 2007. However, it seems that we are nearing the upper bound of individuals willing to pay for one or more streaming memberships, especially in developed markets like the U.S & Canada. International growth will be a crucial aspect of future growth prospects, as well as any merger and acquisition activity within the streaming industry. We expect Netflix will utilize its strong cash reserves, user data, and international recognition to grow operations internationally, especially in the Asia-Pacific region.

ECONOMIC OUTLOOK

Netflix’s revenues are strongly correlated with personal disposable income, with a correlation coefficient of 0.87 based on regression analysis of data from 2014 through 2020. And since personal income is driven in part by strong GDP growth, we have chosen to examine these two economic indicators in concert with inflation. Netflix must keep membership price growth consistent with inflation expectations to maintain stable growth.

Personal Disposable Income

We see personal disposable income as the foremost economic indicator of Netflix’s outlook. The entertainment industry competes for a consumer’s personal disposable income. The U.S., and many parts of the world, are currently in a period of elevated disposable income, largely driven by continued stimulus. This has directly benefited streaming firms, who can charge more for subscriptions and maintain their consumer base. However, it is hard to predict the amount of disposable income people are willing to allocate to streaming, since “consumers’ preferences are currently unknown.” [45]

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As this industry matures, we expect to gain deeper insight into the maximum percentage of disposable income that a consumer is willing to allocate for streaming entertainment. We expect people continue to treat streaming more as a staple than discretionary, which will lower subscription price elasticity. Below, historical year-over-year annual growth in personal disposable income is shown. We see disposable income trending upward, with less volatility in the years to come. This assumption is driven by a broad push toward pay equity, which will increase average disposable income.

Source: FRED – Disposable Personal Income (3/26/21) [46]

GDP Expectations

We see GDP as the second most important economic indicator of Netflix’s performance. Prior to the Covid-19 pandemic, we saw strong year-over-year growth in GDP, and Netflix benefited (both in share price and subscription growth). The graph to the right shows estimates for the U.S. and world 2021 GDP forecast. Consensus expectations for 2021 real GDP growth in the U.S. have increased from 3.9% in January to 6.2% in mid-April.[47] This growth outpaces world GDP expectations, which rose from 5.2% to 5.8% in the same time period. [47] We expect a robust economic recovery as a result:

• seamless vaccine distribution • pent-up consumer demand • higher disposable income

While we expect a robust economic recovery, it is important to note our recession fears. We expect the stock market might enter a small correction in the next six months, which would drive down Netflix’s share price.

Source: FRED – Gross Domestic Product (3/25/2021) [47]

Inflation & Interest Rates

Our biggest worry right now is inflation. The Fed is slowly bringing interest rates back up to 2%, but this is still well below the historical average. Furthermore, the money supply is increasing due to Covid-19 relief bills. This is setting the stage for hyper-inflation in years to come. We expect inflation to continue rising as the Fed maintains its quantitative easing policy. However, we do not expect the Fed to raise the Federal Funds rate in the next year, since Fed Chair Powell has been adamant about maintaining low rates for as long as it takes the economy to recover.

We also see interest rate risk as a large threat to Netflix. The company has a large amount of debt, which is used to fund content expenditures. And while Netflix has upgraded its credit rating twice in the past year, we still see rising interest rates as a threat.

VALUATION

Revenue Decomposition

The revenue decomposition breaks down revenue based on the average number of paying memberships and the average revenue per membership for the following regions: U.S. & Canada (UCAN), Europe & Middle East (EMEA), Latin America (LATAM), and Asia-Pacific (APAC). The number of monthly memberships is a key metric used to gauge popularity of streaming platforms. Our projections for growth in memberships, by region, is shown below. The most aggressive growth is projected in the Asia-Pacific region due to increasing internet accessibility and lower levels of market saturation.

0%

2%

4%

6%

8%

10%

12%

14%

16%

2018-01 2019-01 2020-01 2021-01

Personal Disposable Income (Annual YoY %)

01234567

Apr-

20

May

-20

Jun-

20

Jul-2

0

Aug-

20

Sep-

20

Oct

-20

Nov

-20

Dec

-20

Jan-

21

Feb-

21

Mar

-21

Apr-

21

US and World 2021 GDP Forecast (Annual YoY %)

US GDP 2021 Forecast World GDP 2021 Forecast

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Source: Henry Fund Model – Revenue Decomposition

Income Statement

Income statement items were forecasted as a percentage of sales, with the exception of cost of revenue, depreciation & amortization, interest income, and interest expense.

• COR was forecasted using projected content expenditures, content amortization, and beginning content assets

• D&A was forecasted using an average of the implied historical depreciation rate of the previous two year: 18.00%.

• Interest income was forecasted using the return on investment based on the 5 year average of the one-year Treasury Bill: 1.40%

• Interest expense was forecasted using the pre-tax cost of debt: 2.68%

A breakdown of historical operating expenses can be found in the Cost Structure Analysis subsection on Page 3. Our key operating expense assumption is that Netflix will experience economies of scale and cost of revenue (as a percent of sales) will decrease.

Balance Sheet

The main assumptions in our balance sheet projections are:

• No acquisitions • No debt refinancing • No public issuance of additional stock • No repurchasing of stock • Content assets with be fully amortized

Netflix has historically maintained debt levels of no more than 10% of total enterprise value. We forecasted this by modelling long-term debt as a percent of total assets. Netflix has a $750 million revolving credit facility, and as of December 31, 2020, no amounts had been borrowed.” [9] It is also important to note that Netflix currently has $8.2 billion in cash & cash equivalents, which makes them well-poised to handle any debt-related obligations in the years to come.

Netflix has made no acquisitions in its operating history. Rather, Netflix copies a competitor’s successes to expand business operations. We have projected no acquisitions in the future, and expect company growth to be organic. We also do not forecast any additional issuance of stock in the next ten years, other than through the employee stock option plan. Netflix currently has no share buyback program, but has stated initiating a program as they turn free cash flow positive.

Capital Expenditures

Netflix is continually growing its business, and this growth is sustained through adequate capex. In recent years, Netflix has increased their capex by 50% or more (with the exception of 2018). We expect significantly lower capex in the coming years, as Netflix scales their business model. However, we expect increased content spending, which can viewed similar to capex. Content spending has increased tremendously year-over-year, largely due to the streaming wars. We anticipate Netflix will spend even more in 2021, and attempt to stay ahead of competition via robust original content.

Risk-Free Rate & WACC

Our team is bullish on interest rates in the near-term. We have chosen the 20-year Treasury rate as our risk free rate, which is a break from the tradition of using the 10-year in the past. This is primarily driven by unprecedented, low interest rates that will only rise in the coming months and years. Sensitivity analysis was used to test plus-or-minus 15 basis points of the current risk free rate, and yielded a share price range between $587-631 per share. We believe this captures Netflix’s true value, as this is likely where the 10-year interest rate will settle in the long-term according to the Fed. Federal reserve guidance on interest rates should be monitored closely to account for any fundamental changes in our model.

0.0%

20.0%

40.0%

60.0%

80.0%

2020 2021E 2022E 2023E 2024E 2025E

Average Paying Membership Growth by Region

UCAN growth EMEA growth LATAM growth APAC growth

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The weighted average cost of capital has a dramatic effect on the target share price for DCF analysis. Sensitivity testing yielded a share price range of $573-675 per share based on a 30 basis point change in the WACC. The inputs used in the calculation of our 5.99% WACC are extremely sensitive to changes in the risk-free rate, equity risk premium, and beta. We chose to use an equity risk premium of 4.90%, which is similar to the historical geometric average of 4.88%. This decision was largely based on our long-term investment horizon, and the idea that market conditions repeat themselves.

Valuation Model

Discounted cash flow (DCF) analysis, dividend discount modelling (DDM), and relative valuation (RV) were used to obtain a target price range of $605-610 per share. This target price range was largely derived from the DCF model, as it is the most practical valuation method for Netflix. The model outputs are summarized in the table, below, and an analysis and commentary of each model is provided.

Method Target Value DCF $608.43 RV (PEG EPS21) $572.52 DDM $509.45 RV (P/E EPS21) $331.01

Source: Henry Fund Model

The discounted cash flow analysis model is the most practical for valuing a company such as Netflix. Our model predicted a share price of $608.43 per share, representing a 10.7% upside from the trading price as of 4/20/2021. We believe this model adequately represents Netflix’s financial outlook, and that Netflix is trading largely on a DCF basis. We forecasted a continuing value growth in NOPLAT of 1.17%, which is conservative but captures how Netflix is maturing as a firm. We forecasted a continuing value growth in ROIC of 31.69%, which is higher than historical averages but captures Netflix’s large growth opportunity from past content expenditures. Ultimately, this model captures a conservative share price and we believe NFLX is a strong buy.

The relative valuation method is the next most practical method for valuating a company such as Netflix. Our model predicted a share price of $572.52 per share using 1-year forward PEG, which represents a 4.2% upside to the current share price. Our model also suggests a share price of $331.01 using the 1-year forward P/E. We believe

Netflix’s high concentration in streaming revenues relative to peers yields a lower share price on a relative valuation basis. As such, we find these prices to be too low relative to Netflix’s true value. The companies we used to estimate Netflix’s share price on a relative valuation basis are Disney, Amazon, Comcast, AT&T, Apple, ViacomCBS, and Alphabet. These companies all have share buyback programs in place to bolster earnings, so it is understandable that Netflix is trading at a premium based on a price-to-earnings valuation. However, Netflix is trading at a discount on a PEG basis due to the continued high-growth state of the company. We ultimately decided this model only captures a small portion of Netflix’s projected share price.

The dividend discount model is the least effective in estimating Netflix’s value, since Netflix does not pay dividends. This model is most applicable for companies that pay dividends and are in a stable-growth phase; Netflix is neither. The DDM projected a share price of $509.45 per share, which is much lower than the other methods of analysis, and a discount to its current share price. We did not use this model to determine our target price for Netflix.

KEYS TO MONITOR

Netflix has captured tremendous market share as a result of being the first mover. Netflix will face challenges maintaining this market share, especially as more competitors debut streaming services. Keys to monitor in the coming months and years include:

• Percent disposable income allocated to streaming • Competitor year-over-year growth in subscribers • Netflix membership growth in APAC region • Original content production and popularity • Effectiveness of password sharing crackdown

We believe any material changes in the above bullet points will require an adjusted model to accurately reflect Netflix’s intrinsic equity value. We believe Netflix is currently trading below its intrinsic value, and recommend a buy rating.

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REFERENCES 1. FactSet: Snapshot

2. Yahoo! Finance: Analysis

3. Netflix 10-K (FYE 2020 filing, see page 22) 4. Yahoo! Finance: NFLX Historical Data

5. Netflix: About – Mission Statement

6. Netflix Investor Relations: Long-term view https://ir.netflix.net/ir-

overview/long-term-view/default.aspx

7. Netflix 10-K (FYE 2020 filing, see pages 23,24) 8. Brittanica: Netflix (accessed at

https://www.britannica.com/topic/Netflix-Inc)

9. Netflix 10-K (FYE 2019 filing, see page 1) 10. Netflix 10-K (FYE 2020 filing, see page 22) 11. Netflix 10-K (FYE 2020 filing, see pages 22) 12. Netflix 10-K (FYE 2020 filing, see pages 23,24) 13. Netflix 10-K (FYE 2019 filing, see page 23) 14. Netflix 10-K (FYE 2020 filing, see page 22) 15. Netflix 10-K (FYE 2020 filing, see pages 23,24) 16. Netflix: Plans and Pricing

17. FactSet: NFLX Business Segments

18. Netflix 10-K (FYE 2020 filing, see pages 23,24) 19. Netflix 10-K (FYE 2020 filing, see page 24) 20. Netflix 10-K (FYE 2020 filing, see page 24) 21. Netflix 10-K (FYE 2020 filing, see pages 23,24) 22. Netflix 10-K (FYE 2020 filing, see page 20) 23. Comparitech: Which countries pay the most for Netflix? (accessed

at https://www.comparitech.com/blog/vpn-privacy/countries-

netflix-cost/ and

https://docs.google.com/spreadsheets/d/1vi66pkbCwJyzBcy4G8M

FqmyZ--FtJkSfMssTPFiNgXg/edit#gid=1760867363)

24. Netflix: Celebrate the year of the ox (accessed at

https://about.netflix.com/en/news/netflix-launches-its-lunar-new-

year-collection)

25. S&P: Netflix Inc. upgraded to ‘BB+’ (accessed at

https://disclosure.spglobal.com/ratings/en/regulatory/article/-

/view/type/HTML/id/2584695)

26. Netflix 10-K (FYE 2020 filing, see page 56) 27. CNBC Netflix Earnings Report (04/20/2021)

28. Yahoo! Finance: NFLX

29. CNN Business: Netflix is raising prices (accessed at

https://www.cnn.com/2020/10/29/media/netflix-raises-

prices/index.html)

30. NYTimes: Netflix tests a clampdown on password sharing (accessed

at https://www.nytimes.com/2021/03/14/business/media/netflix-

password-sharing.html)

31. Statista: Number of DirecTV video subscribers

32. Statista: Number of active mobile broadband subscriptions

worldwide

33. SpeedTest Global Index: Global Speeds March 2021

34. Statista - Digital Media Report 2020: Video-on-Demand

35. Statista: Video content budget of Netflix worldwide

36. eMarketer: Time spent with type of media

37. Netflix Investor Relations: Long-term view https://ir.netflix.net/ir-

overview/long-term-view/default.aspx

38. Statista: Video on Demand – Netflix brand report

39. Visual Capitalist: Which streaming service has the most subscibers?

(accessed at https://www.visualcapitalist.com/which-streaming-

service-has-the-most-subscriptions/)

40. Platform websites: Pricing Plans

41. Forbes: Streaming Wars Continue (accessed at

https://www.forbes.com/sites/sergeiklebnikov/2020/05/22/strea

ming-wars-continue-heres-how-much-netflix-amazon-disney-and-

their-rivals-are-spending-on-new-content/?sh=3a4cf802623b)

42. FactSet: ESG

43. Netflix – Environmental, Social, and Governance 2020

44. Yahoo! Finance – Sustainability

45. Berkeley Economic Review – The economics driving the streaming

industry (10/21/2019)

46. FRED: Disposable personal income (as of 03/26/2021)

47. Bloomberg Database: U.S. and World GDP Forecast 2021

DISCLAIMER

Henry Fund reports are created by graduate students in the Applied Securities Management program at the University of Iowa’s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund analysts are not registered investment advisors, brokers or licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold an investment position in the companies mentioned in this report.

Netflix, Inc.Revenue Decomposition - in millions, except per membership

Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030EAverage Paying MembershipsUS & Canada (UCAN) 61.85 66.62 71.69 76.35 80.17 83.57 86.50 89.09 91.32 93.15 94.78 96.44 98.12

YoY Growth (%) 11.1% 7.7% 7.6% 6.5% 5.0% 4.3% 3.5% 3.0% 2.5% 2.0% 1.8% 1.8% 1.8%Europe, Middle East, and Africa (EMEA) 31.60 44.73 60.43 75.53 90.64 104.23 116.74 127.25 136.16 143.64 150.11 155.74 160.88

YoY Growth (%) 47.1% 41.5% 35.1% 25.0% 20.0% 15.0% 12.0% 9.0% 7.0% 5.5% 4.5% 3.8% 3.3%Latin America (LATAM) 22.77 28.39 35.30 40.77 46.07 51.14 55.74 59.64 62.92 66.07 69.04 72.14 75.39

YoY Growth (%) 34.6% 24.7% 24.3% 15.5% 13.0% 11.0% 9.0% 7.0% 5.5% 5.0% 4.5% 4.5% 4.5%Asia-Pacific (APAC) 8.45 13.25 21.67 31.97 44.76 60.42 78.55 98.19 117.82 135.50 149.05 160.22 170.64

YoY Growth (%) 60.2% 56.8% 63.6% 47.5% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 7.5% 6.5%Total Paying Memberships 125 153 189 225 262 299 338 374 408 438 463 485 505

YoY Growth (%) 25.5% 22.7% 23.6% 18.8% 16.5% 14.4% 12.7% 10.9% 9.1% 7.4% 5.6% 4.7% 4.2%

Average Monthly Revenue per Paying MembershipUS & Canada (UCAN) 11.16 12.57 13.32 13.72 13.93 14.13 14.35 14.56 14.78 15.00 15.23 15.46 15.69

YoY Growth (%) 11.9% 12.6% 6.0% 3.0% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%Europe, Middle East, and Africa (EMEA) 10.45 10.33 10.72 11.04 11.32 11.54 11.72 11.89 12.07 12.25 12.44 12.62 12.81

YoY Growth (%) 14.0% -1.1% 3.8% 3.0% 2.5% 2.0% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%Latin America (LATAM) 8.19 8.21 7.45 7.75 8.02 8.26 8.47 8.64 8.77 8.90 9.03 9.17 9.30

YoY Growth (%) 1.2% 0.2% -9.3% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.5% 1.5% 1.5% 1.5%Asia-Pacific (APAC) 9.33 9.24 9.12 9.21 9.35 9.49 9.63 9.78 9.92 10.07 10.22 10.38 10.53

YoY Growth (%) 2.4% -1.0% -1.3% 1.0% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%

Revenue by RegionUS & Canada (UCAN) 8,282 10,048 11,459 12,570 13,396 14,175 14,891 15,568 16,197 16,768 17,318 17,885 18,471

YoY Growth (%) 24.4% 21.3% 14.0% 9.7% 6.6% 5.8% 5.1% 4.5% 4.0% 3.5% 3.3% 3.3% 3.3%Europe, Middle East, and Africa (EMEA) 3,963 5,545 7,773 10,008 12,310 14,439 16,414 18,160 19,723 21,120 22,401 23,590 24,734

YoY Growth (%) 67.7% 39.9% 40.2% 28.8% 23.0% 17.3% 13.7% 10.6% 8.6% 7.1% 6.1% 5.3% 4.8%Latin America (LATAM) 2,238 2,797 3,156 3,790 4,433 5,068 5,663 6,180 6,618 7,053 7,481 7,935 8,416

YoY Growth (%) 36.2% 25.0% 12.8% 20.1% 17.0% 14.3% 11.7% 9.1% 7.1% 6.6% 6.1% 6.1% 6.1%Asia-Pacific (APAC) 946 1,469 2,372 3,534 5,021 6,881 9,079 11,519 14,030 16,376 18,284 19,950 21,566

YoY Growth (%) 64.1% 55.3% 61.5% 49.0% 42.1% 37.0% 32.0% 26.9% 21.8% 16.7% 11.7% 9.1% 8.1%

DVD-by-Mail Revenues 366 297 239 192 153 123 98 78 63 50 40 32 26YoY Growth (%) -18.8% -18.7% -19.5% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0% -20.0%

Total revenue 15,794 20,156 24,999 30,093 35,313 40,686 46,145 51,506 56,630 61,368 65,524 69,392 73,213YoY Growth (%) 35.1% 27.6% 24.0% 20.4% 17.3% 15.2% 13.4% 11.6% 9.9% 8.4% 6.8% 5.9% 5.5%

Further Decomposition:Average Paying Memberships as % of Total 2020 Population:US & Canada (UCAN) 16.90% 18.20% 19.59% 20.86% 21.90% 22.83% 23.63% 24.34% 24.95% 25.45% 25.90% 26.35% 26.81%

YoY Growth (%) 11.1% 7.7% 7.6% 6.5% 5.0% 4.2% 3.5% 3.0% 2.5% 2.0% 1.8% 1.8% 1.8%Europe, Middle East, and Africa (EMEA) 1.44% 2.03% 2.75% 3.43% 4.12% 4.74% 5.31% 5.78% 6.19% 6.53% 6.82% 7.08% 7.31%

YoY Growth (%) 47.1% 41.5% 35.1% 25.0% 20.0% 15.0% 12.0% 9.0% 7.0% 5.5% 4.5% 3.8% 3.3%Latin America (LATAM) 3.46% 4.31% 5.36% 6.19% 7.00% 7.77% 8.47% 9.06% 9.56% 10.04% 10.49% 10.96% 11.45%

YoY Growth (%) 34.6% 24.7% 24.3% 15.5% 13.0% 11.0% 9.0% 7.0% 5.5% 5.0% 4.5% 4.5% 4.5%Asia-Pacific (APAC) 0.20% 0.31% 0.50% 0.74% 1.04% 1.41% 1.83% 2.28% 2.74% 3.15% 3.47% 3.73% 3.97%

YoY Growth (%) 60.2% 56.8% 63.6% 47.5% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 7.5% 6.5%

Netflix, Inc.Income Statement - in millions, except EPS

Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030ERevenues 15,794 20,156 24,996 30,093 35,313 40,686 46,145 51,506 56,630 61,368 65,524 69,392 73,213

Cost of revenues -9,968 -12,440 -15,276 -16,826 -19,472 -21,216 -22,196 -24,063 -25,478 -27,067 -28,608 -30,364 -32,864Marketing -2,369 -2,652 -2,228 -3,310 -3,531 -3,865 -4,268 -4,636 -4,955 -5,216 -5,406 -5,551 -5,857Technology & development -1,222 -1,545 -1,830 -2,257 -2,684 -3,133 -3,599 -4,069 -4,530 -4,909 -5,242 -5,551 -6,040General & administrative -630 -914 -1,076 -1,354 -1,483 -1,709 -1,892 -2,086 -2,265 -2,424 -2,588 -2,741 -2,929Depreciation & amortization -83 -104 -116 -173 -216 -265 -319 -376 -436 -498 -561 -623 -683

Total expenses -14,272 -17,656 -20,526 -23,920 -27,387 -30,188 -32,274 -35,229 -37,665 -40,115 -42,405 -44,831 -48,372Operating Income (loss) 1,522 2,501 4,470 6,173 7,926 10,498 13,871 16,276 18,965 21,252 23,119 24,562 24,840

Interest expense -420 -626 -767 -563 -652 -726 -803 -908 -991 -1,094 -1,236 -1,347 -1,343Interest & other income (expense) 42 84 -618 115 164 246 356 495 673 867 1,091 1,358 1,629

Income (loss) before income taxes 1,143 1,959 3,084 5,725 7,438 10,019 13,423 15,863 18,647 21,026 22,974 24,572 25,126Provision for (benefit from) income taxes 15 195 438 1,345 1,748 2,354 3,155 3,728 4,382 4,941 5,399 5,775 5,905Net income (loss) 1,128 1,763 2,646 4,380 5,690 7,664 10,269 12,135 14,265 16,085 17,575 18,798 19,221

Weighted average shares outstanding - basic 435 438 441 444 448 451 454 458 460 460 460 460 460Net earnings (loss) per share - basic 2.59 4.03 6.00 9.86 12.71 16.99 22.60 26.51 31.04 35.00 38.24 40.90 41.82

Net EPS growth 129.77% 55.45% 48.98% 64.28% 28.94% 33.69% 32.99% 17.31% 17.08% 12.75% 9.27% 6.96% 2.25%

Netflix, Inc.Balance Sheet - in millions

Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030EAssetsCash & cash equivalents 3,794 5,018 8,206 11,748 17,632 25,474 35,426 48,219 62,112 78,146 97,294 116,663 132,589Short-term investments - - - - - - - - - - - - -Current content assets, net 5,151 - - - - - - - - - - - -Other current assets 748 1,160 1,556 1,610 1,889 2,177 2,469 2,756 3,030 3,283 3,506 3,712 3,917Total current assets 9,694 6,179 9,762 13,358 19,522 27,651 37,894 50,974 65,142 81,429 100,800 120,376 136,506Content assets, net 14,961 24,505 25,384 30,654 34,916 38,268 42,500 46,707 50,910 55,243 59,426 63,461 66,935Property & equipment, gross 787 981 1,455 1,870 2,358 2,919 3,556 4,267 5,049 5,896 6,801 7,758 8,769Less: accumulated depreciation -369 -416 -495 -668 -884 -1,149 -1,468 -1,844 -2,280 -2,779 -3,340 -3,963 -4,646Property & equipment, net 418 565 960 1,203 1,474 1,770 2,088 2,423 2,769 3,118 3,461 3,796 4,123Other non-current assets 901 2,727 3,175 3,942 4,626 5,330 6,045 6,747 7,419 8,039 8,584 9,090 9,591Total assets 25,974 33,976 39,280 49,157 60,537 73,019 88,527 106,852 126,239 147,829 172,270 196,722 217,155

LiabilitiesCurrent content liabilities 4,686 4,414 4,430 5,349 6,093 6,678 7,416 8,150 8,884 9,640 10,370 11,074 11,680Accounts payable 563 674 656 948 1,112 1,282 1,454 1,622 1,784 1,933 2,064 2,186 2,306Accrued expenses & other liabilities 477 843 1,102 1,294 1,518 1,749 1,984 2,215 2,435 2,639 2,818 2,984 3,148Deferred revenue 761 925 1,118 1,384 1,624 1,872 2,123 2,369 2,605 2,823 3,014 3,192 3,368Short-term debt - - 500 502 735 735 449 1,151 1,110 1,776 4,087 5,386 2,688Total current liabilities 6,487 6,856 7,806 9,477 11,083 12,316 13,426 15,508 16,818 18,811 22,353 24,822 23,190Non-current content liabilities 3,759 3,334 2,618 3,162 3,601 3,947 4,383 4,817 5,251 5,698 6,129 6,545 6,904Long-term debt 10,360 14,759 15,809 18,228 20,906 23,167 25,875 28,570 31,247 33,954 36,534 39,011 41,206Other non-current liabilities 129 1,444 1,982 2,272 2,666 3,072 3,484 3,889 4,276 4,633 4,947 5,239 5,528Total liabilities 20,736 26,394 28,215 33,139 38,257 42,502 47,168 52,784 57,591 63,096 69,963 75,617 76,828

Stockholder's EquityCommon stock & APIC 2,316 2,794 3,448 4,021 4,593 5,166 5,739 6,312 6,627 6,627 6,627 6,627 6,627Accumulated other comprehensive income (loss) -20 -24 44 44 44 44 44 44 44 44 44 44 44Retained earnings (accumulated deficit) 2,942 4,812 7,573 11,953 17,643 25,307 35,576 47,711 61,977 78,061 95,636 114,434 133,655Total stockholders' equity (deficiency) 5,239 7,582 11,065 16,018 22,280 30,518 41,359 54,068 68,648 84,733 102,308 121,106 140,327

Netflix, Inc.Historical Cash Flow Statement - in millions

Fiscal Years Ending Dec. 31 2014 2015 2016 2017 2018 2019 2020Net income (loss) 267 123 187 559 1211 1867 2761

Additions to streaming content assets -3773 -5772 -8653 -9806 -13043 -13917 -11779

Change in streaming content liabilities 593 1162 1773 900 1000 -694 -757

Amortization of streaming content assets 2656 3405 4788 6198 7532 9216 10807

Amortization of DVD content library 71 79 79 61 41 - -

Depreciation & amortization of property, equipment & intangibles54 62 58 72 83 104 116

Stock-based compensation expense 115 125 174 182 321 405 415

Excess tax benefits from stock-based compensation -89 -80 -65 - - - -

Other non-cash items 15 32 41 57 40 228 293

Foreign currency remeasurement loss (gain) on debt - - - 141 -74 -46 533

Deferred income taxes -30 -59 -47 -209 -86 -94 70

Other current assets -9 19 47 -234 -200 -252 -188

Accounts payable 84 52 32 75 199 96 -42

Accrued expenses & other liabilities 56 49 69 114 150 158 198

Deferred revenue 59 72 97 178 142 164 193

Other non-current assets & liabilities -52 -18 -52 -74 2 -123 -194

Net cash flows from operating activities 16 -749 -1474 -1786 -2680 -2887 2427

Purchases of property & equipment -70 -91 -108 -173 -174 -253 -498

Acquisition of DVD content library -75 -78 -77 -54 -39 - -

Change in other assets 1 -2 -1 -7 -127 -134 -7

Purchases of short-term investments -427 -372 -187 -75 - - -

Proceeds from sale of short-term investments 527 364 423 343 - - -

Net cash flows from investing activities -43 -179 50 34 -339 -387 -505

Proceeds from issuance of debt 400 1500 1000 3021 3962 4469 1009

Debt issuance costs -7 -18 -11 -32 -36 -36 -8

Proceeds from issuance of common stock 61 78 37 88 125 72 235

Excess tax benefits from stock-based compensation 89 80 65 - - - -

Other financing activities -1 -1 0 0 -2 - -

Net cash flows from financing activities 542 1640 1092 3077 4049 4506 1237

Effect of exchange rate changes on cash, cash equivalents & restricted cash-7 -16 -9 30 -40 0 36

Net increase (decrease) in cash, cash equivalents & restricted cash509 696 -342 1355 989 1232 3195

Cash, cash equivalents & restricted cash, beginning of year 605 1114 1809 1468 2823 3812 5044

Cash, cash equivalents & restricted cash, end of year 1114 1809 1468 2823 3812 5044 8239

Netflix, Inc.Forecasted Cash Flow Statement - in millions

Fiscal Years Ending Dec. 31 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030ECash flow from Operating ActivitiesNet income 4380 5690 7664 10269 12135 14265 16085 17575 18798 19221

Add: Depreciation & amortization 173 216 265 319 376 436 498 561 623 683

Changes in Working Capital:

Change in other current assets -54 -279 -287 -292 -287 -274 -253 -222 -207 -204

Change in current content liabilities 920 744 585 738 734 733 756 730 704 606

Change in accounts payable 292 164 169 172 169 161 149 131 122 120

Change in accrued expenses and other liabilities 192 224 231 235 230 220 204 179 166 164

Change in deferred revenue 266 240 247 251 247 236 218 191 178 176

Changes in Non-Working Capital:

Change in other non-current assets -768 -684 -704 -715 -702 -671 -621 -545 -507 -500

Change in non-current content liabilities 544 440 346 436 434 433 447 431 416 358

Change in other non-current liabilities 290 394 406 412 405 387 358 314 292 288

Net cash flow from operating activities: 6234 7150 8922 11825 13741 15927 17841 19345 20585 20913

Cash flow from Investing ActivitiesChange in content assets -5,270 -4,262 -3,352 -4,231 -4,208 -4,203 -4,333 -4,183 -4,034 -3,474

Change in capital expenditures -415 -487 -562 -637 -711 -782 -847 -904 -958 -1011

Net cash flow from operating activities: -5685 -4750 -3914 -4868 -4919 -4984 -5180 -5088 -4992 -4485

Cash flow from Financing ActivitiesChange in short-term debt 2 233 0 -286 702 -41 666 2311 1299 -2698

Change in long-term debt 2419 2678 2261 2708 2695 2677 2707 2579 2477 2196

Change in shares repurchased - - - - - - - - - -

Change in common stock 573 573 573 573 573 315 0 0 0 0

Change in accumulated other comprehensive income 0 0 0 0 0 0 0 0 0 0

Net cash flow from operating activities: 2994 3484 2834 2995 3970 2951 3373 4890 3776 -502

Net increase (decrease) in cash 3543 5884 7842 9951 12793 13894 16034 19148 19369 15926Beginning cash 8206 11748 17632 25474 35426 48219 62112 78146 97294 116663Ending cash 11748 17632 25474 35426 48219 62112 78146 97294 116663 132589

Netflix, Inc.Common Size Income Statement - as % of revenues

Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030ERevenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Cost of revenues 63.1% 61.7% 61.1% 55.9% 55.1% 52.1% 48.1% 46.7% 45.0% 44.1% 43.7% 43.8% 44.9%Marketing 15.0% 13.2% 8.9% 11.0% 10.0% 9.5% 9.3% 9.0% 8.8% 8.5% 8.3% 8.0% 8.0%Technology & development 7.7% 7.7% 7.3% 7.5% 7.6% 7.7% 7.8% 7.9% 8.0% 8.0% 8.0% 8.0% 8.3%General & administrative 4.0% 4.5% 4.3% 4.5% 4.2% 4.2% 4.1% 4.1% 4.0% 4.0% 4.0% 4.0% 4.0%Depreciation & amortization 0.8% 0.8% 0.8% 1.0% 1.1% 1.3% 1.4% 1.6% 1.7% 1.8% 2.0% 2.1% 2.1%

Total expenses 89.8% 87.1% 81.7% 78.9% 76.9% 73.5% 69.2% 67.7% 65.7% 64.6% 63.9% 63.7% 65.1%

Operating Income (loss) 9.6% 12.4% 17.9% 20.5% 22.4% 25.8% 30.1% 31.6% 33.5% 34.6% 35.3% 35.4% 33.9%

Interest expense -2.7% -3.1% -3.1% -1.9% -1.8% -1.8% -1.7% -1.8% -1.8% -1.8% -1.9% -1.9% -1.8%Interest & other income (expense) 0.3% 0.4% -2.5% 0.4% 0.5% 0.6% 0.8% 1.0% 1.2% 1.4% 1.7% 2.0% 2.2%

Income (loss) before income taxes 7.2% 9.7% 12.3% 19.0% 21.1% 24.6% 29.1% 30.8% 32.9% 34.3% 35.1% 35.4% 34.3%Provision for (benefit from) income taxes 0.1% 1.0% 1.8% 4.5% 4.9% 5.8% 6.8% 7.2% 7.7% 8.1% 8.2% 8.3% 8.1%Net income (loss) 7.1% 8.7% 10.6% 14.6% 16.1% 18.8% 22.3% 23.6% 25.2% 26.2% 26.8% 27.1% 26.3%

Netflix, Inc.Common Size Balance Sheet - as % of revenues

Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030EAssetsCash & cash equivalents 24.0% 24.9% 32.8% 39.0% 49.9% 62.6% 76.8% 93.6% 109.7% 127.3% 148.5% 168.1% 181.1%Short-term investments - - - - - - - - - - - - -Current content assets, net 32.6% - - - - - - - - - - - -Other current assets 4.7% 5.8% 6.2% 5.4% 5.4% 5.4% 5.4% 5.4% 5.4% 5.4% 5.4% 5.4% 5.4%Total current assets 61.4% 30.7% 39.1% 44.4% 55.3% 68.0% 82.1% 99.0% 115.0% 132.7% 153.8% 173.5% 186.5%Content assets, net 94.7% 121.6% 101.6% 101.9% 98.9% 94.1% 92.1% 90.7% 89.9% 90.0% 90.7% 91.5% 91.4%Property & equipment, gross 5.0% 4.9% 5.8% 6.2% 6.7% 7.2% 7.7% 8.3% 8.9% 9.6% 10.4% 11.2% 12.0%Less: accumulated depreciation -2.3% -2.1% -2.0% -2.2% -2.5% -2.8% -3.2% -3.6% -4.0% -4.5% -5.1% -5.7% -6.3%Property & equipment, net 2.6% 2.8% 3.8% 4.0% 4.2% 4.4% 4.5% 4.7% 4.9% 5.1% 5.3% 5.5% 5.6%Other non-current assets 5.7% 13.5% 12.7% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1%Total assets 164.5% 168.6% 157.1% 163.3% 171.4% 179.5% 191.8% 207.5% 222.9% 240.9% 262.9% 283.5% 296.6%

LiabilitiesCurrent content liabilities 29.7% 21.9% 17.7% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5%Accounts payable 3.6% 3.3% 2.6% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2%Accrued expenses & other liabilities 3.0% 4.2% 4.4% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%Deferred revenue 4.8% 4.6% 4.5% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6%Short-term debt - - 2.0% 1.7% 2.1% 1.8% 1.0% 2.2% 2.0% 2.9% 6.2% 7.8% 3.7%Total current liabilities 41.1% 34.0% 31.2% 31.5% 31.4% 30.3% 29.1% 30.1% 29.7% 30.7% 34.1% 35.8% 31.7%Non-current content liabilities 23.8% 16.5% 10.5% 10.3% 10.3% 10.3% 10.3% 10.3% 10.3% 10.3% 10.3% 10.3% 10.3%Long-term debt 65.6% 73.2% 63.2% 48.7% 48.7% 48.7% 48.7% 48.7% 48.7% 48.7% 48.7% 48.7% 48.7%Other non-current liabilities 0.8% 7.2% 7.9% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6%Total liabilities 131.3% 130.9% 112.9% 110.1% 108.3% 104.5% 102.2% 102.5% 101.7% 102.8% 106.8% 109.0% 104.9%

Stockholder's EquityCommon stock & APIC 14.7% 13.9% 13.8% 13.4% 13.0% 12.7% 12.4% 12.3% 11.7% 10.8% 10.1% 9.6% 9.1%Accumulated other comprehensive income (loss) -0.1% -0.1% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%Retained earnings (accumulated deficit) 18.6% 23.9% 30.3% 39.7% 50.0% 62.2% 77.1% 92.6% 109.4% 127.2% 146.0% 164.9% 182.6%Total stockholders' equity (deficiency) 33.2% 37.6% 44.3% 53.2% 63.1% 75.0% 89.6% 105.0% 121.2% 138.1% 156.1% 174.5% 191.7%

Netflix, Inc.Common Size Balance Sheet - as % of total assets

Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030EAssetsCash & cash equivalents 14.6% 14.8% 20.9% 23.9% 29.1% 34.9% 40.0% 45.1% 49.2% 52.9% 56.5% 59.3% 61.1%Short-term investments - - - - - - - - - - - - -Current content assets, net 19.8% - - - - - - - - - - - -Other current assets 2.9% 3.4% 4.0% 3.3% 3.1% 3.0% 2.8% 2.6% 2.4% 2.2% 2.0% 1.9% 1.8%Total current assets 37.3% 18.2% 24.9% 27.2% 32.2% 37.9% 42.8% 47.7% 51.6% 55.1% 58.5% 61.2% 62.9%Content assets, net 57.6% 72.1% 64.6% 62.4% 57.7% 52.4% 48.0% 43.7% 40.3% 37.4% 34.5% 32.3% 30.8%Property & equipment, gross 3.0% 2.9% 3.7% 3.8% 3.9% 4.0% 4.0% 4.0% 4.0% 4.0% 3.9% 3.9% 4.0%Less: accumulated depreciation -1.4% -1.2% -1.3% -1.4% -1.5% -1.6% -1.7% -1.7% -1.8% -1.9% -1.9% -2.0% -2.1%Property & equipment, net 1.6% 1.7% 2.4% 2.4% 2.4% 2.4% 2.4% 2.3% 2.2% 2.1% 2.0% 1.9% 1.9%Other non-current assets 3.5% 8.0% 8.1% 8.0% 7.6% 7.3% 6.8% 6.3% 5.9% 5.4% 5.0% 4.6% 4.4%Total assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

LiabilitiesCurrent content liabilities 18.0% 13.0% 11.3% 10.9% 10.1% 9.1% 8.4% 7.6% 7.0% 6.5% 6.0% 5.6% 5.4%Accounts payable 2.2% 2.0% 1.7% 1.9% 1.8% 1.8% 1.6% 1.5% 1.4% 1.3% 1.2% 1.1% 1.1%Accrued expenses & other liabilities 1.8% 2.5% 2.8% 2.6% 2.5% 2.4% 2.2% 2.1% 1.9% 1.8% 1.6% 1.5% 1.4%Deferred revenue 2.9% 2.7% 2.8% 2.8% 2.7% 2.6% 2.4% 2.2% 2.1% 1.9% 1.7% 1.6% 1.6%Short-term debt - - 1.3% 1.0% 1.2% 1.0% 0.5% 1.1% 0.9% 1.2% 2.4% 2.7% 1.2%Total current liabilities 25.0% 20.2% 19.9% 19.3% 18.3% 16.9% 15.2% 14.5% 13.3% 12.7% 13.0% 12.6% 10.7%Non-current content liabilities 14.5% 9.8% 6.7% 6.4% 5.9% 5.4% 5.0% 4.5% 4.2% 3.9% 3.6% 3.3% 3.2%Long-term debt 39.9% 43.4% 40.2% 37.1% 34.5% 31.7% 29.2% 26.7% 24.8% 23.0% 21.2% 19.8% 19.0%Other non-current liabilities 0.5% 4.3% 5.0% 4.6% 4.4% 4.2% 3.9% 3.6% 3.4% 3.1% 2.9% 2.7% 2.5%Total liabilities 79.8% 77.7% 71.8% 110.1% 108.3% 104.5% 102.2% 102.5% 101.7% 102.8% 106.8% 109.0% 104.9%

Stockholder's EquityCommon stock & APIC 8.9% 8.2% 8.8% 8.2% 7.6% 7.1% 6.5% 5.9% 5.2% 4.5% 3.8% 3.4% 3.1%Accumulated other comprehensive income (loss) -0.1% -0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Retained earnings (accumulated deficit) 11.3% 14.2% 19.3% 24.3% 29.1% 34.7% 40.2% 44.7% 49.1% 52.8% 55.5% 58.2% 61.5%Total stockholders' equity (deficiency) 20.2% 22.3% 28.2% 32.6% 36.8% 41.8% 46.7% 50.6% 54.4% 57.3% 59.4% 61.6% 64.6%

Netflix, Inc.Value Driver Estimation - in millions

Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

NOPLAT:Revenue 15,794 20,156 24,996 30,093 35,313 40,686 46,145 51,506 56,630 61,368 65,524 69,392 73,213Cost of revenues -9,968 -12,440 -15,276 -16,826 -19,472 -21,216 -22,196 -24,063 -25,478 -27,067 -28,608 -30,364 -32,864Marketing -2,369 -2,652 -2,228 -3,310 -3,531 -3,865 -4,268 -4,636 -4,955 -5,216 -5,406 -5,551 -5,857Technology & development -1,222 -1,545 -1,830 -2,257 -2,684 -3,133 -3,599 -4,069 -4,530 -4,909 -5,242 -5,551 -6,040General & administrative -630 -914 -1,076 -1,354 -1,483 -1,709 -1,892 -2,086 -2,265 -2,424 -2,588 -2,741 -2,929Depreciation & amortization -83 -104 -116 -173 -216 -265 -319 -376 -436 -498 -561 -623 -683Implied operating lease expense 18 39 48 61 72 85 98 111 124 136 148 158 167

EBITA: 1,540 2,540 4,517 6,234 7,999 10,583 13,969 16,387 19,089 21,389 23,267 24,719 25,007

Adjusted TaxesProvision for income taxes 15 195 438 1,345 1,748 2,354 3,155 3,728 4,382 4,941 5,399 5,775 5,905Marginal tax rate 28.92% 26.09% 23.44% 23.50% 23.50% 23.50% 23.50% 23.50% 23.50% 23.50% 23.50% 23.50% 23.50%Tax on lease interest 5 10 11 14 17 20 23 26 29 32 35 37 39Tax on interest and other income 110 141 325 105 115 113 105 97 75 53 34 -3 -67

Adjusted taxes 130 347 774 1,465 1,880 2,487 3,283 3,851 4,486 5,026 5,468 5,809 5,877

Change in Deferred Taxes -86 -94 70 0 0 0 0 0 0 0 0 0 0NOPLAT: 1,324 2,098 3,814 4,769 6,119 8,096 10,686 12,536 14,603 16,362 17,799 18,910 19,131

NOPLAT growth 128.62% 58.46% 81.73% 25.05% 28.31% 32.31% 32.00% 17.31% 16.49% 12.05% 8.78% 6.24% 1.17%

Invested Capital (IC):Operating current assets

Normal cash 2,625 3,350 4,154 5,001 5,869 6,762 7,669 8,560 9,411 10,199 10,890 11,532 12,167Other current assets 748 1,160 1,556 1,610 1,889 2,177 2,469 2,756 3,030 3,283 3,506 3,712 3,917

Total operating current assets 3,373 4,510 5,710 6,611 7,758 8,938 10,138 11,315 12,441 13,482 14,395 15,245 16,084

Non-interest current libailitiesCurrent content liabilities -4,686 -4,414 -4,430 -5,349 -6,093 -6,678 -7,416 -8,150 -8,884 -9,640 -10,370 -11,074 -11,680Accounts payable -563 -674 -656 -948 -1,112 -1,282 -1,454 -1,622 -1,784 -1,933 -2,064 -2,186 -2,306Accrued expenses & other liabilities -477 -843 -1,102 -1,294 -1,518 -1,749 -1,984 -2,215 -2,435 -2,639 -2,818 -2,984 -3,148Deferred revenue -761 -925 -1,118 -1,384 -1,624 -1,872 -2,123 -2,369 -2,605 -2,823 -3,014 -3,192 -3,368

Total non-interest current liabilities -6,487 -6,856 -7,306 -8,975 -10,348 -11,581 -12,977 -14,357 -15,708 -17,035 -18,266 -19,436 -20,502

Other long-term operating assetsContent assets, net 14,961 24,505 25,384 30,654 34,916 38,268 42,500 46,707 50,910 55,243 59,426 63,461 66,935Property & equipment, net 418 565 960 1,203 1,474 1,770 2,088 2,423 2,769 3,118 3,461 3,796 4,123Other non-current assets (incl PV Op Lease) 901 2,727 3,175 3,942 4,626 5,330 6,045 6,747 7,419 8,039 8,584 9,090 9,591

Total other long-term operating assets 16,280 27,797 29,519 35,799 41,016 45,368 50,633 55,878 61,097 66,400 71,471 76,347 80,649

Other long-term operating liabilitiesNon-current content liabilities -3,759 -3,334 -2,618 -3,162 -3,601 -3,947 -4,383 -4,817 -5,251 -5,698 -6,129 -6,545 -6,904Other non-current liabilities -129 -1,444 -1,982 -2,272 -2,666 -3,072 -3,484 -3,889 -4,276 -4,633 -4,947 -5,239 -5,528

Total other long-term operating liabilities -3,888 -4,779 -4,600 -5,434 -6,267 -7,019 -7,867 -8,706 -9,526 -10,331 -11,076 -11,784 -12,431

Invested Capital 9,278 20,673 23,323 28,001 32,158 35,707 39,927 44,130 48,304 52,516 56,524 60,371 63,799

Free Cash Flow (FCF):NOPLAT 1,324 2,098 3,814 4,769 6,119 8,096 10,686 12,536 14,603 16,362 17,799 18,910 19,131Change in IC 4,387 11,395 2,650 4,678 4,157 3,549 4,219 4,204 4,174 4,212 4,008 3,848 3,428FCF -3,063 -9,296 1,164 91 1,962 4,547 6,467 8,333 10,429 12,151 13,791 15,063 15,703

FactSet Est=33 FactSet Est=1212FactSet Est=3572Return on Invested Capital (ROIC):

NOPLAT 1,324 2,098 3,814 4,769 6,119 8,096 10,686 12,536 14,603 16,362 17,799 18,910 19,131Beginning IC 4,891 9,278 20,673 23,323 28,001 32,158 35,707 39,927 44,130 48,304 52,516 56,524 60,371ROIC 27% 23% 18% 20% 22% 25% 30% 31% 33% 34% 34% 33% 32%

Economic Profit (EP):Beginning IC 4,891 9,278 20,673 23,323 28,001 32,158 35,707 39,927 44,130 48,304 52,516 56,524 60,371x (ROIC - WACC) 21% 17% 12% 14% 16% 19% 24% 25% 27% 28% 28% 27% 26%EP 1,032 1,545 2,580 3,377 4,448 6,177 8,556 10,154 11,970 13,480 14,666 15,538 15,528

Netflix, Inc.Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity: ASSUMPTIONS:Risk-Free Rate 2.25% 20-year Treasury BondBeta 0.82 5-year monthly betaEquity Risk Premium 4.90% Henry Fund ERP based on geometric averageCost of Equity 6.29%

Cost of Debt:Risk-Free Rate 2.25% 20-year Treasury BondImplied Default Premium 0.43%Pre-Tax Cost of Debt 2.68% YTM on NFLX 10-year bondMarginal Tax Rate 24%After-Tax Cost of Debt 2.05%

Market Value of Common Equity: MV WeightsTotal Shares Outstanding 441Current Stock Price $514.00MV of Equity 226,634 92.43%

Market Value of Debt:Short-Term Debt 500Current Portion of LTD -Long-Term Debt 15809PV of Operating Leases 2262MV of Total Debt 18,571 7.57%

Market Value of the Firm 245,205 100.00%

Estimated WACC 5.97%

Netflix, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth of NOPLAT 1.17% CV Year ROIC 31.69% WACC 5.97% Cost of Equity 6.29%

Fiscal Years Ending Dec. 31 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

DCF Model:Free Cash Flow (FCF) 91 1962 4547 6467 8333 10429 12151 13791 15063 15703Continuing Value (CV) 383785PV of FCF 85 1747 3821 5129 6236 7366 8099 8674 8941 227805

Value of Operating Assets: 277905Non-Operating Adjustments

Excess cash 4051PV of operating leases -2262Short and long-term debt -16309

Value of Equity 263385Shares Outstanding 441Intrinsic Value of Last FYE 597.35$ Implied Price as of Today 608.43$

EP Model:Economic Profit (EP) 3377 4448 6177 8556 10154 11970 13480 14666 15538 15528Continuing Value (CV) 323413PV of EP 3187 3961 5191 6786 7600 8454 8985 9225 9223 191970

Total PV of EP 254582Invested Capital (last FYE) 23323Value of Operating Assets: 277905

Non-Operating AdjustmentsExcess cash 4051PV of operating leases -2262Short and long-term debt -16309

Value of Equity 263385Shares Outstanding 441Intrinsic Value of Last FYE 597.35$ Implied Price as of Today 608.43$

Netflix, Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

EPS 9.86$ 12.71$ 16.99$ 22.60$ 26.51$ 31.04$ 35.00$ 38.24$ 40.90$ 41.82$

Key Assumptions CV growth of EPS 2.25%

CV Year ROE 13.70%

Cost of Equity 6.29%

Future Cash Flows P/E Multiple (CV Year) 20.70

EPS (CV Year) 41.82$

Future Stock Price 865.89

Dividends Per Share - - - - - - - - -

Discounted Cash Flows - - - - - - - - - 500.17

Intrinsic Value as of Last FYE 500.17$

Implied Price as of Today 509.45$

Netflix, Inc.Relative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2021E 2022E P/E 21 P/E 22 EPS gr. PEG 21 PEG 22 Enterprise Value (EV) Sales EBITDADIS The Walt Disney Company $182.79 $2.81 $5.48 65.05 33.36 47.73 1.36 0.70 CMCSA Comcast Corporation $54.16 $2.83 $3.63 19.14 14.92 14.57 1.31 1.02 AMZN Amazon.com, Inc. $3,334.69 $47.84 $66.50 69.71 50.15 38.37 1.82 1.31 T AT&T Inc. $29.89 $3.12 $3.14 9.58 9.52 0.99 9.68 9.62 <-- removedAAPL Apple Inc. $133.11 $4.51 $4.76 29.51 27.96 14.94 1.98 1.87 VIAC ViacomCBS Inc. $37.92 $4.01 $4.24 9.46 8.94 -4.13 (2.29) (2.17) <-- removedGOOGL Alphabet Inc. $2,279.01 $69.88 $81.79 32.61 27.86 16.95 1.92 1.64

Average 33.58 24.67 1.68 1.31

NFLX Netflix, Inc. $514.00 $9.86 $12.71 52.1 40.4 34.60 1.5 1.2

Implied Relative Value: P/E (EPS21) $ 331.01 P/E (EPS22) 313.61$ PEG (EPS21) 572.52$ PEG (EPS22) 575.75$

Netflix, Inc.Key Management Ratios

Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

Liquidity Ratios:Current ratio (current assets/current liabilities) 1.49 0.90 1.25 1.41 1.76 2.25 2.82 3.29 3.87 4.33 4.51 4.85 5.89Quick ratio (cash+short-term investments+content assets)/current liabilities 2.89 4.31 4.30 4.47 4.74 5.18 5.80 6.12 6.72 7.09 7.01 7.26 8.60Cash ratio ((cash+marketable securities)/current liabilities) 0.58 0.73 1.05 1.24 1.59 2.07 2.64 3.11 3.69 4.15 4.35 4.70 5.72

Asset-Management Ratios:Content assets turnover (revenue/average content assets) 1.25 1.02 1.00 1.07 1.08 1.11 1.14 1.15 1.16 1.16 1.14 1.13 1.12Total asset turnover (revenue/average total assets) 0.70 0.67 0.68 0.68 0.64 0.61 0.57 0.53 0.49 0.45 0.41 0.38 0.35Net working capital turnover (revenue/net working capital) 4.93 -29.76 12.78 7.75 4.18 2.65 1.89 1.45 1.17 0.98 0.84 0.73 0.65

Financial Leverage Ratios:Debt to equity ratio (total liabilities/common equity) 8.95 9.45 8.18 8.24 8.33 8.23 8.22 8.36 8.69 9.52 10.56 11.41 11.59Equity ratio (common equity/total assets) 0.09 0.08 0.09 0.08 0.08 0.07 0.06 0.06 0.05 0.04 0.04 0.03 0.03Debt ratio (total liabilities/total assets) 0.80 0.78 0.72 0.67 0.63 0.58 0.53 0.49 0.46 0.43 0.41 0.38 0.35

Profitability Ratios:Gross margin ((revenue-cost of revenue)/revenue) 163.11% 161.72% 161.11% 155.91% 155.14% 152.15% 148.10% 146.72% 144.99% 144.11% 143.66% 143.76% 144.89%Profit margin (net income/net sales) 7.14% 8.75% 10.58% 14.55% 16.11% 18.84% 22.25% 23.56% 25.19% 26.21% 26.82% 27.09% 26.25%EBITDA margin (EBITDA/net sales) 9.11% 11.89% 17.42% 19.94% 21.83% 25.15% 29.37% 30.87% 32.72% 33.82% 34.43% 34.50% 33.00%Return on Equity (net income/total stockholder equity) 21.53% 23.26% 23.91% 27.34% 25.54% 25.11% 24.83% 22.44% 20.78% 18.98% 17.18% 15.52% 13.70%

Payout Policy Ratios:Total Payout Ratio ((Dividends + Repurchases)/NI) 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%Divdend Payout Ratio 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%

Netflix, Inc.Present Value of Operating Lease Obligations - in millions

Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

Year 1 172 249 320 379 445 512 581 649 713 773 825 874 922Year 2 139 246 312 372 437 503 571 637 701 759 811 859 906Year 3 145 226 300 350 410 473 536 598 658 713 761 806 851Year 4 157 211 279 326 383 441 500 558 614 665 710 752 793Year 5 151 195 258 301 353 407 462 515 566 614 655 694 732Thereafter 944 912 1100 1347 1581 1821 2066 2306 2535 2747 2933 3107 3278Total Minimum Payments 1708 2039 2570 3075 3609 4158 4716 5263 5787 6271 6696 7091 7482Less: Cumulative Interest 249 252 308 374 439 506 574 641 705 764 815 864 911PV of Minimum Payments 1460 1787 2262 2701 3169 3651 4141 4622 5082 5507 5880 6228 6571

Implied Interest in Year 1 Payment 17.6 39.1 47.9 60.6 72.4 84.9 97.9 111.0 123.9 136.2 147.6 157.6 166.9

Pre-Tax Cost of Debt 2.68% 2.68% 2.68% 2.68% 2.68% 2.68% 2.68% 2.68% 2.68% 2.68% 2.68% 2.68% 2.68%Years Implied by Year 6 Payment 6.2 4.7 4.3 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5Expected Obligation in Year 6 & Beyond 151.2 194.506 258 301 353 407 462 515 566 614 655 694 732

Present Value of Lease PaymentsPV of Year 1 168.0 242.1 311.9 369.1 433.1 499.0 565.9 631.7 694.5 752.6 803.6 851.0 897.9PV of Year 2 132.2 233.5 296.1 353.1 414.4 477.5 541.5 604.4 664.6 720.2 768.9 814.3 859.2PV of Year 3 134.1 208.8 277.1 323.0 379.0 436.6 495.2 552.7 607.7 658.6 703.2 744.7 785.7PV of Year 4 140.8 190.2 251.0 293.4 344.2 396.6 449.8 502.1 552.0 598.2 638.7 676.4 713.7PV of Year 5 132.5 170.4 226.3 263.7 309.4 356.5 404.3 451.3 496.2 537.7 574.2 608.0 641.5PV of 6 & beyond 752.1 741.9 899.6 1098.5 1289.1 1485.2 1684.5 1880.2 2067.2 2240.2 2391.9 2533.1 2672.6Capitalized PV of Payments 1459.6 1786.9 2262.0 2700.7 3169.2 3651.3 4141.3 4622.4 5082.3 5507.5 5880.5 6227.6 6570.5

Netflix, Inc.Effects of ESOP Exercise and Share Repurchases on Common Stock Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 19Average Time to Maturity (years): 5.55Expected Annual Number of Options Exercised: 3

Current Average Strike Price: 170.23$ Cost of Equity: 6.29%Current Stock Price: $514.00

Fiscal Years Ending Dec. 31 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

Increase in Shares Outstanding: 3 3 3 3 3 2Average Strike Price: 170.23$ 170.23$ 170.23$ 170.23$ 170.23$ 170.23$ Increase in Common Stock Account: 573 573 573 573 573 315 - - - -

Share Repurchases ($) 0 0 0 0 0 0 0 0 0 0Expected Price of Repurchased Shares: 514.00$ 546.32$ 580.67$ 617.18$ 655.98$ 697.23$ 741.07$ 787.66$ 837.19$ 889.83$ Number of Shares Repurchased: - - - - - - - - - -

Shares Outstanding (beginning of the year) 441 444 448 451 454 458 460 460 460 460Plus: Shares Issued Through ESOP 3 3 3 3 3 2 0 0 0 0Less: Shares Repurchased in Treasury - - - - - - - - - - Shares Outstanding (end of the year) 444 448 451 454 458 460 460 460 460 460

Netflix, Inc.Valuation of Options Granted under ESOP

Current Stock Price $514.00

Risk Free Rate 2.25%

Current Dividend Yield 0.00%

Annualized St. Dev. of Stock Returns 34.93% 5Y average

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares (M) Price Life (yrs) Price GrantedRange 1 18.68 170.23 5.55 370.14$ 6,913$

Range 2 -$

Range 3 -$

Range 4 -$

Range 5 -$

Range 6 -$

Range 7 -$

Range 8 -$

Range 9 -$

Total 19 170.23$ 5.55 370.14$ 6,913$

Netflix, Inc.Sensitivity Tables

608.43 4.75% 4.80% 4.85% 4.90% 4.95% 5.00% 5.05% 608.43 5.00% 5.50% 6.00% 6.50% 7.00% 8% 8.00%0.74 694.22 687.51 680.90 674.40 668.00 661.69 655.49 12.30% 534.89 558.48 585.09 615.31 649.95 690.04 736.99 0.77 668.94 662.37 655.91 649.54 643.28 637.12 631.05 12.80% 534.19 557.76 584.33 614.52 649.11 689.15 736.04 0.80 645.14 638.71 632.39 626.16 620.04 614.01 608.08 13.30% 533.49 557.03 583.57 613.72 648.27 688.26 735.09 0.83 622.70 616.41 610.22 604.12 598.13 592.23 586.43 16.60% 528.89 552.24 578.56 608.46 642.73 682.39 728.83 0.86 601.51 595.35 589.29 583.32 577.46 571.69 566.01 14.30% 532.10 555.58 582.05 612.13 646.59 686.48 733.20 0.89 581.47 575.43 569.50 563.66 557.92 552.27 546.71 14.80% 531.40 554.85 581.29 611.33 645.75 685.59 732.25 0.92 562.49 556.57 550.76 545.04 539.42 533.89 528.44 15.30% 530.71 554.13 580.53 610.53 644.91 684.70 731.30

608.43 22.00% 22.50% 23.00% 23.50% 24.00% 24.50% 25.00% 608.43 12.00% 14.00% 16.00% 18.00% 20.00% 22.00% 24.00%2.10% 645.39 640.66 635.93 631.20 626.46 621.72 616.98 2.55% 612.97 611.36 610.17 609.32 608.71 608.29 608.00 2.15% 637.50 632.82 628.14 623.45 618.77 614.08 609.39 2.60% 612.62 611.01 609.83 608.98 608.37 607.95 607.66 2.20% 629.77 625.14 620.50 615.87 611.23 606.59 601.95 2.65% 612.28 610.67 609.49 608.64 608.03 607.61 607.32 2.25% 622.19 617.60 613.02 608.43 603.84 599.25 594.65 2.70% 611.93 610.32 609.14 608.29 607.69 607.27 606.98 2.30% 614.75 610.22 605.68 601.14 596.59 592.05 587.50 2.75% 611.58 609.98 608.80 607.95 607.35 606.92 606.64 2.35% 607.46 602.97 598.48 593.99 589.49 584.99 580.49 2.80% 611.24 609.63 608.46 607.61 607.00 606.58 606.30 2.40% 600.31 595.87 591.42 586.97 582.52 578.07 573.61 2.85% 610.89 609.29 608.11 607.26 606.66 606.24 605.96

608.43 1.20% 1.25% 1.30% 1.35% 1.40% 1.45% 1.5% 608.43 37.15% 37.20% 37.25% 37.50% 37.75% 38.00% 38.25%5.70% 657.77 663.26 668.88 674.63 680.51 686.53 692.70 7.70% 982.49 930.02 883.69 715.02 608.65 535.44 481.98 5.80% 639.83 645.03 650.33 655.76 661.31 666.99 672.80 7.80% 898.33 855.54 817.32 674.49 581.35 515.81 467.19 5.90% 622.68 627.60 632.61 637.74 642.99 648.35 653.83 7.90% 829.44 793.88 761.80 639.29 557.05 498.04 453.62 6.00% 606.27 610.92 615.67 620.52 625.48 630.54 635.72 8.00% 772.01 741.99 714.69 608.43 535.29 481.86 441.13 6.10% 590.54 594.95 599.44 604.04 608.73 613.52 618.42 8.10% 723.40 697.72 674.21 581.16 515.67 467.08 429.60 6.20% 575.46 579.64 583.90 588.25 592.70 597.23 601.87 8.20% 681.73 659.51 639.04 556.88 497.91 453.53 418.91 6.30% 560.99 564.95 569.00 573.12 577.34 581.63 586.02 8.30% 645.60 626.19 608.21 535.13 481.75 441.04 408.98

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