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BUY

Analysts Sean Baloun Alec Crane Sean-Baloun@uiowa.edu Alec-Crane@uiowa.edu Jared Blatz Matthew Fritz Jared-Blatz@uiowa.edu Matthew-D-Fritz@uiowa.edu

Company Overview Netflix is a media streaming service headquartered in Los Gatos, California. They were founded by CEO Reed Hastings and co-founder Marc Randolph in 1997 as the replacement to the obsolete brick and mortar DVD rental business. They made in home entertainment easy and accessible to the masses. Netflix began as a DVD delivery service at a time when VHS was the popular channel for entertainment distribution. A drastic change occurred in the trajectory of Netflix when it transitioned to online streaming in 2007. Since then, Netflix has positioned itself as the dominant player in the online entertainment industry with a global subscriber base of approximately 120 million people and growing. Going forward the company plans to maintain their competitive positioning by placing emphasis on international expansion and original content production.

Stock Performance Highlights 52 week High $338.62

52 week Low $138.26

Beta Value 1.78

Share Highlights Market Capitalization $127.57 Bln

Shares Outstanding $433.95 Bln

Next Est. EPS (2018, Q2) $1.15

Forward P/E 186.91

Company Performance Highlights Operating Margin

ROA 10.24%

ROE 14.55%

Sales $5.55 Bln

Financial Ratios Price-to-Earnings 268.85

Debt to Equity 0.39%

Current Price $332 Target Price $ 388.54 - 392.54 Current Price $ 336.06

Drivers of Thesis

• Global markets are largely unsaturated and Netflix has the best strategic positioning to meet demand abroad with operations in 190 countries and licensing arrangements extending into China.

• We expect U.S. real gross domestic product to remain healthy in the near term and long term. Consumer confidence should remain and at high levels due to the effects of fiscal stimulus. This should result in increased discretionary spending.

• Netflix plans to invest $8 billion dollars in original content in 2018 alone in order to penetrate foreign markets. The investment will help secure their competitive positioning within the industry.

• Netflix is the first ever public firm to create a business model entirely dedicated to implementation and improvement direct internet streaming services.

Risks of Thesis

• Netflix currently has a Price-to-Earnings multiple of 268, which is three times the size of competitors Disney and Time Warner. The market may currently attribute too much expected aggregate industry growth to Netflix.

• International consumers are less likely to subscribe to multiple subscription services making competition abroad fiercer than competition at home. If competitors secure members before Netflix the firm may not realize the full growth potential priced into the current valuation.

One Year Stock Performance

Source: FactSet2

Consumer discretionary Netflix, Inc. (NASDAQ: NFLX) April 17, 2017 Stock Rating: BUY

Krause Fund Research Spring 2018

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Real Gross Domestic Product

Real gross domestic product is the value of all finished goods and services produced in a country over a period of time. This metric is often used to indicate the health of the economy. Real GDP increased at a CAGR of 3.16% and 2.89% in quarters three and four of 2017.3 These values are relatively strong compared to the average 10 year CAGR of 2.11%.2 As reflected in the graph below, consumer spending currently accounts for roughly 70% of real GDP. We expect consumption as a percentage of GDP to remain at current levels for the foreseeable future. Because of this, we view changes in real GDP as the strongest indication of the direction of the consumer discretionary sector. Though declining growth in real GDP may negatively affect the consumer discretionary sector as a whole, the subscription based business may be an exception. People have the tendency to hold onto subscription services in during economic downturns.

Source: FRED 3

Forecast

The FOMC’s median forecast for 2018 real GDP is 2.7%, followed by a gradual decrease to 1.8% in the long run.4 We view this forecast as overly pessimistic. As a result of increased investment, low unemployment, and projected wage gains, we expect real GDP to be 3% in 2018. We assume economic growth will gradually decrease over the next 3 years, reaching 2.0% by 2021.

Our optimism is primarily driven from the stimulus we expect corporate and personal tax cuts to provide. In January 2018, the current administration enacted a tax overhaul reducing the corporate tax rate from 35% to 21% and reducing personal income taxes across the board. We expect the lower tax rates will increase investment in the U.S. and supply households with more discretionary income. In the long term we view interest rates and a gradual decrease in consumer spending as the primary contributors to the decline in real GDP growth.

Investment and Production

The Institute for Supply Management (ISM) comes out with a report each month detailing the month to month activity of the private sector economy.11 They create the PMI index which shows what the demand for producion is in America by tracking variables such as output and new orders. Demand for manufacturing increases when companies and consumers have more money to spend on inputs and household items. Typically, a reading grater than 50 signals increased economic activity. The PMI hit a 5 year high of 60.8 in Febrauary 20185. Current levels of 59.3 remain above last years average of 57.5. 5

PMI INDEX

Source: ISM 5

With new orders, production, and employment still growing,, we expect levels to remain elevated at 58-60 throughout 2018. The optimism surrounding ISM is a good sign for business. More money will travel throughout the economy in the coming year and in the pockets of households.

Unemployment

The unemployment rate is the percentage of unemployed persons in the labor force. A healthy rate of natural unemployment is considered to be 5%.43 Since the finiancial crisis the unemploymenr rate has decreased from 10% in 2010, to a current rate of 4.1%.6 The economy has been gaining momentum and we view recent tax cuts will be a positive stimulus to an already thriving business environment. Companies such as Apple have promised to create 20,000 new jobs,7 and foreign companies are increasing greenfield investments in the United States.8 In consideration of the expected increase of economic activity in 2018 we expect unemployment to hit 4.0% this year. As unemployment decreases further there will be an increased number of people receiving a stable income and thus more people buying services such as Netflix.

Wage Gains

Contrary to the positive rhetoric regarding unemployment levels, the downward pressures on wages from the recession of ‘09 have remained throughout the recovery. In quarter 4 of 2010, year over year nominal wage growth was 2.5%. In quarter

Macroeconomic Outlook

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4 of 2017 it was 2.4%.9 These growth rates are small relative to the 4% we were experiening before 2008.8 When workers are not getting large increases in pay they are not encouraged to increase their spending. However, we have just begun to see some upward pressure on wages and thus increased space for discretionary spending. This can be seee in the graph below. Personal income has increased for the fourth straight month at 0.4%3.

Source: FRED 3

Given the increase in investment, tight labor market, and current phase of the economic cycle, we expect monthy personal income growth to be in the range of 0.4% and 0.6% throughout 2018. The stability and growth in wages will give consumers confidence in their spending habits and find themselves more willing to use money for discretionary spening.

Consumer Sentiment

Consumer confidence is a survey index that measures the public opinion on future business conditions, income growth, and job availability.11 The consumer confidence index is a key indicator for the health of the consumer discretionary sector. With a more confident consumer comes a greater willingness to spend. Historically, consumer confidence increases during expansionary periods. Consumer confidence hit an 18 year high of 101.05 in February, 2018 followed by a slight decrease to 97.8 in March.11 We attribute the decrease of confidence to uncertainty surrounding trade negotiations with China. The threat of a trade war would mean increase costs for business and higher consumer prices. However, recently Chinese President Xi Jinping has announced plans to ease capital controls on directforeign investment.42 We expect the consumer confidence index to rise in the near term and remain at approximately 101.0 throughout 2018.

Source:: OECD12

Capital Markets Outlook A relatively new occurrence within the markets is the rise in volatility. A 20% drop in the VIX shook the markets on February 6, 2018 and since then stocks seen a greater level of volatility. We feel volatility will remain a factor as long as the current administration retains its protectionalist position on economic development causing disruption to a historically stable domestic balance of payments. Furthermore, we expect uncertainty surounding the expected probability of interst rate increases to facor into market volatility. As interest rates rise so will the attraction for fixed-income instruments. We expect large sums of liquidity to transfer from equities to fixed income securities as interest rates increase.

However, we view this volatility as normalized.

Industry Synopsis

GICS classifies Netflix as an Internet & Direct Marketing Retail firm. Online media streaming is one of the features of the continuously evolving information technology era that we are a part of. Streaming began with YouTube in 2005. The streaming space has evolved rapidly with Netflix being the first company to stream television shows and movies online in 2007. Increasingly, convenience and immediate satisfaction is becoming a demand from consumers. The internet and direct marketing retail industry is catering to that norm. We have seen an exponential adoption of online streaming services due to their accommodative and innovative nature. For example, viewership is enhanced with the unison of more than one device. Consumers can quickly stream content through content through PC’s, televisions, and smart phones as long as they are connected to the internet. User experience is another feature the industry focuses on as a way to disrupt the entertainment industry. Unlike traditional television, online media streaming companies utilize the data they have on you to provide you with an optimal set of choices when deciding what to watch. Accessing entertainment through the internet was a trend that is now becoming a norm.

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Industry Analysis

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Internet Trend

More and more consumer are cutting the cord and opting instead to for direct internet streaming. The shift to the internet is a tremendous threat to traditional television networks. The below tells the story of the customer gains and losses for cable companies in comparison to gains for online streaming companies such as Netflix, Hulu, and Amazon Prime.

Year Pay TV Gains/Losses Internet Gains

2012 170,000 2,000,000

2013 -100,500 2,600,000

2014 -125,000 3,000,000

2015 -385,000 3,100,000

2016 -795,000 2,700,000

2017 -1,495,000 2,100,000

Source: Leichtman Research Group 13

However, traditional television still has an established position in the U.S. This can be attributed to an increasing hesitance of older generations to cut the cord. The below represents consumption habits by age.

Source: Statista14

Approximately 50% of adult’s age 18-44 claim to use streaming services more than they do traditional TV. That number decreases to the 13% – 27% range for adults ages 45 and older. We expect the internet streaming to be the primary source of entertainment for adults age 18 – 4, increasing the percentage of those who use streaming more than traditional to 90% by 2025. We feel adults age 45 – 64 will be late adopters and increase their willingness to stream more than watch traditional to 50% by 2025. Lastly, baby boomers are traditional and have their habits established by now. We expect a very slow shift of this demographic towards internet streaming.

Revenue Streams

The two primary streams of revenue are subscription payments and advertising. The subscription based model is becoming increasingly popular. Usually, companies within the industry structure their services in such a way that consumers pay a fixed fee at various price levels based off how much they want to get out of the service. For example, Netflix offers a base rate that allows you to lets you stream TV shows and movies from Netflix on one device at a time in standard definition whereas its gold membership gives you access to lets you stream TV shows and movies from Netflix on four devices at the same time and in high definition. Companies can also chose to receive revenue from streaming advertisements. 2017 was the first year that digital advertising spending was higher than traditional TV. This reflects the increase in popularity of the industry and we expect companies that show ads such as Hulu to leverage this trend.

Source: Statista9 A relatively new revenue stream is original content production and licensing. The move for Netflix to license out Narcos to Univision in 2017 was the first of its kind. Additionally, Netflix intends to utilize this strategy as a means to access the Chinese market.30 We expect this large growth of this revenue stream for the industry moving forward especially as a means to access the Chinese marketplace.

Competitive Landscape

Through first mover advantage, Netflix has a strong foothold within the industry. As online streaming has grown in popularity, the level of competition has increased. Below is a graph showing the popularity of the various players in the media streaming industry that have entered the market since 2007. Given performance, size, and scope; we view Amazon and Hulu as Netflix’s primary competitors. HBO GO requires a cable subscription and is therefore not relevant to our industry analysis.

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Distribution of advertising spending in the U.S

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Source: Statista14

Competitors

Recognizing the streaming trend, Amazon created Amazon Prime Video in February 2011. Since then it has made its way up to second place on the totem pole with an estimated 44 million subscribers.15 Members have access to Amazon Primes streaming library for $12.99 per month or $99.00 per year. Amazon’s streaming service is bundled with the Amazon Prime membership in 16 countries. This can be seen as an advantage in that customer acquisition and data retrieval comes easy due to Amazon’s large presence in areas other than streaming. Furthermore, Amazon has $20 billion cash sitting on their balance sheet which can be used for expanding prime video to additional countries. In 2017, Amazon Prime Video received a greater number of views than Netflix within Germany, India, and Japan.15 The narrative that Amazon shakes up any industry it enters stays true in media and entertainment.

Hulu differentiates itself in its focus on television shows. Their show, The Handmaid’s Tale was the first online streaming service series to win an Emmy for outstanding drama in 2017. They have also recently rolled out their new live television streaming service, an attractive feature for sports fans. Never the less, they still lag behind Netflix and Amazon. This can be attributed to the fact that it is only accessible in the US. Furthermore, Hulu did not have an ad free business model for a while, a move that could be attributed to their lack of capturing more market share. Hulu has recognized the distaste for ads and offers an ad free option for $11.99. However, Netflix is add free and has a baseline subscription for $10.99.

Differentiation

The value proposition within the industry is content quality and user experience. The type of content that is delivered is either licensed or originally produced. Thus, exclusivity of content

plays a large role in differentiation. For example, the show Atlanta can be played on both Hulu and Amazon Video. Whereas Netflix has exclusive licensing deals with Marvel. This is an advantage because Netflix now has exclusive access to a specific market of marvel fans. Contrary to licensing content, Original production is a strategy companies can utilize as well.

Original production can be seen as a way to differentiate your content and also establish a new revenue stream. For example, in 2016 Netflix licensed out it’s originally produced show Narcos. With greater quality comes more attention to your service.

User experience is another area that companies want to outperform their competitors in. Companies work hard to make an aesthetically pleasing and smooth interface for users scrolling through entertainment options. They also work hard to ensure the entertainment options provided will be ones the user might want. Thus, the ability to collect and logically implement data is a key differentiator in the industry.

Forecasts

We expect Amazon to continue gaining ground as it acquires customers by expanding prime video into additional countries. This could adversely impact Netflix. For example, an Amazon Prime member who receives video streaming services may find purchasing Netflix unnecessary because of the similarity between the two services. Specifically, developing nations have less money to spend on discretionary services and therefore may opt to choose either Netflix or Amazon, but not both. Provided Amazon has such a large amount of cash and intends to continue expanding its streaming service globally, we expect demand and costs of licensing content to increase.

We expect Hulu to lose market share due to a lack of competitive advantage. Their ad free subscription is $11.99 which makes it approximately 10% costlier than Netflix’s base rate subscription model. Netflix increased their price in 2017 yet gained more subscribers than Hulu. Furthermore, Hulu only has a domestic presence and has yet to successfully make steps toward international expansion. This decreases their profitability in a business model built on efficiencies found from accessing vast economies of scale.

Porter’s Five Forces

Rivalry among Existing Competitors: Moderate There is a greater concentration of firms in this industry meaning that a small number of firms own a large market share, which reduces competition. Netflix is the current leader in market share, followed by Amazon Video. Market share is relatively stable due to negligible switching costs between competitors for consumers in developed nations. For example, American consumers are willing to purchase both a Netflix and an Amazon Prime Video account. The industry is under capacity as a result of recent expansion into global markets, resulting in increasing pricing power. 2017 is evident of this as Netflix increased prices by 10% while at the same time increasing the number of subscribers.

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Firms such as Netflix must take into account the fact that they are not the only company in the industry expanding into unsaturated markets. These markets are the last to be entered on account of their poor internet infrastructure and accessibility. Therefore, consumers in these markets are less willing to purchase two subscriptions. As media streaming becomes more popular across the globe, companies will compete to have first access.

Threat of Entry: Moderate It is difficult for firms to enter this industry because it requires economies of scale, with brand recognition being a primary catalyst to expansion. It would be difficult for firms to incentivize a consumer to add a fourth subscription or chose their services over already well established firm such as Amazon, Hulu, and Netflix. Additionally, new entrants would require access to capital to purchase exclusive content rights. It is costly for Internet & Direct Marketing Retail firms to access capital because the market is dominated by few major players. However, firms like Disney with a loyal consumer base and access to a capital have the resources and the reach to establish their own set of consumers.

Threat of Substitutes: Moderate Firms compete on the basis price for exclusive rights to stream content assets. The rights to stream a content asset are typically 2-5 years in length at which point the exclusive privileges to stream end and the contract goes up for bidding. This makes it difficult for firms to maintain a differentiated product.

Furthermore, the availability of pirated content on the internet remains a significant threat to the industry. Consumers put their computers and themselves at risk by streaming pirated content. However this threat remains as long as consumers’ value of immediacy outweigh the costs associated with pirating content.

Power of Buyers: Low Consumers do not have bargaining power because prices are reasonably inexpensive. Many consumers even maintain multiple streaming services for this reason. There is a certain amount of inertia when it comes to subscription models. Similar to a gym membership, when you sign up you keep it.

Power of Suppliers: High The nature of content license arrangements are not always identical. Suppliers have the ability to adjust the duration and exclusivity of individual licensing arrangements as they see fit. This means that suppliers are able to charge higher prices for exclusive rights and longer contracts. Suppliers often maintain the rights to withdraw the content rights on short notice. Firms compete on the basis of price for streaming rights to content assets, making licensing all the more expensive. Once a contract expires, firms must spend time and resources to determine whether or not it is beneficial on a cost basis to renew the arrangement.

Firms that produce original content are exposed to many risks including exorbitant production costs, ongoing guild payments, talent costs, seller negotiation costs, and consumer acceptance of the content. These firms compete in a global market which requires detailed analysis of multiple consumer bases, which is very costly.

Catalysts for Growth & Change

Global Expansion

Netflix has forecasted the point at which the domestic market will be saturated to be between 60-90 million subscribers. There are currently 54.75 million subscribers domestically which has caused Netflix to place an emphasis on global expansion. Netflix has expanded operation abroad in all developed nations. In recent years, developing countries have seen improvement in internet infrastructure leading to untapped demand for streaming content. The table below reflects internet usage across the globe.

Source: International Telecommunications Union16

Developed areas like North America have already contributed substantially to the industry’s growth. For example, 95% of North America’s population uses the internet. Contrast this with the region of Africa where only 35% of the population uses the internet. There is potential for large untapped markets if positive strides are taken such that internet use increases across the globe. New developments like the implementation of African Undersea Cables improve transmission speeds and internet infrastrucure.17 With improvements like this in developing countries, the industry will continue to benefit from an expanding consumer base. Cisco Forecasts global IP traffic to reach 3.3 ZB by 2021, a 75% increase from 2016 levels.18 We feel the world recognizes the necessity of internet and expect global internet penetration rates to increase to 95% by 2027.

Netflix experiences exponential growth rates upon entering these countries. For example, in 2015 Netflix expanded operations to Japan, Australia, New Zealand, Spain, Portugal, and Italy and achieved a year of year growth rate of 49.3%. In 2016 Netflix expanded to the rest of the world achieving extraordinary growth in international revenues of 64.4% and 58.5% in 2016 and 2017 respectively. Because the global expansion was only two years ago we believe international revenues will maintain an average level of roughly 43% over the next 3 years. After this point the growth rate of international revenues will decrease gradually and reach a continuing value of 5%.

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Original Production

Firms in the internet streaming space have placed an increased focus on original content production as a means of maintaining their competitive advantage. This change is in part due to the competitive nature of content licensing arrangements. For example, Disney intends to pulls it’s content from Netflix and launch a streaming service in 2019.28 Netflix has dedicated $8 billion dollars toward original content production in 2018 alone.29 This strategy not only protect firms from actions of their competitors but also provides value to their customers.

Original shows such as The Handmaid’s Tale produced by Hulu and The Man in the High Castle produced by Amazon Video have received IMDb scores of 8.6 and 8.1 respectively. These show not only received fantastic are what brings awareness to the firms that produce the content. These successes lead us to believe that firms will continue to use original content production as a major part of their business strategy.

Furthermore, the introduction of in original content has presented the industry with the opportunity to engage in content licensing as a means of additional revenue. Through licensing arrangement firms such as Netflix are able to access restricted markets such as The Peoples’ Republic of China.30

Net Neutrality

The roll back of Net Neutrality the FCC recently imposed has created a lot of conversation surrounding the industry. Net neutrality essentially means that ISP companies cannot favor one company over another and must provide equal access to content online. With the rollback, ISP companies could possibly charge more for faster service or “priority lanes” of connection. The consensus is that a higher charge for the priority lane will be directly swallowed by the end service. It is doubtful that the future will have an absolute negative effect on the leading ISPN customers such as Netflix. Netflix’s size give it plenty of leverage to negotiate with ISP providers.

Key Metrics

Netflix is the only public firm operating entirely on the internet direct streaming platform. We identified comparable firms as those which provide streaming services via the internet.

Source: Finder31

Netflix has the largest subscriber base of 120 million followed by Amazon Prime with 100 million. Brand recognition and word of mouth play an important role in the addition of new subscribers making it easier for Netflix to capture untapped market share. The industry requires are amount of fixed costs and small marginal costs resulting in beneficiary gains from economies of scale. There is essential no direct cost to onboard an additional subscriber.

Source: Finder31 Amazon Video has the largest content library followed by Netflix then Hulu. For every title that Amazon pays to either produce or stream they have 2,588 paying subscribers. At this level, Amazon has too much content per subscriber. Therefore a reduction content library may benefit Amazon by reducing content cost without the loss of subscribers. We expect subscriber per title to remain at current level for Netflix as they create more content as a means of capturing international subscriber. Hulu has yet to make concrete steps toward international expansion so we expect to see a decrease in subscribers per title in 2018 and onward. We believe that Amazon uses the Prime Video Service as a means to increase prime memberships and is therefore willing to generate losses. Therefore, we expect the metric to remain at current levels.

Source: FactSet2

EPS

Earnings per share (EPS) is calculated by dividing net income less preferred stock dividends by the weighted average number of diluted shares outstanding. An earnings lower that industry average are indicative of firm in the growth phase. We see this with Netflix as they continue to employ a substantial amount of resources to marketing and content as they expand globally.

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Netflix Hulu Amazon Video

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Ticker Price EPS 2018E P/E 18 BV

Equity PEG 18

AMZN 1,479 8.40 175.98 57.25 733.24

DIS 101.81 6.99 14.57 28.86 132.49

TWX 96.68 7.64 12.66 36.38 126.57

Average 542.61 7.68 70.19 40.83 330.768 NFLX 332.00 1.29 257.9 8.27 364.0

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Price to earnings (P/E) is calculated by dividing the current share price by the Earnings per share. This metric tells us what the market is willing to pay per dollar of earnings generated by the firm. Amazon and Netflix have extraordinarily high P/E ratios indicating the premium paid for expected future returns. We believe Netflix and Amazon are capable of producing the cash flows necessary to justify the current premium.

Price-to-earnings to growth (PEG) is calculated by dividing P/E over the estimated 5 year earnings growth rate. This metric tells us how greatly the market values expected growth potential. A PEG that is greater than the industry average can indicate overvaluation. Netflix’s PEG is roughly 3 times the size of competitors Disney and Time Warner. The means that the market attributes the vast majority of streaming industry growth to Netflix. If competitors’ growth exceed expectation their growth will come at the expense of Netflix because the market is currently pricing the majority of aggregate industry growth to Netflix. We view this as the primary risk to our investment thesis.

General information

As the pioneer of entertainment distribution, Netflix was the first to established market reach both domestically and abroad, positioning itself as a leader in the internet and direct marketing retail industry. In 1997 Netflix became the first ever DVD internet rental service, and in 1999 Netflix strategized an unlimited subscription model. In 2000 they began using break-through algorithmic technologies to improve upon the user recommendations of their model. In 2007 Netflix became what we know to be today, a streaming service. As of December of 2017, they have 120 million subscribers across the globe. They are recognized not only for their licensing capabilities with exclusive access to movies such as Dave Chappelle’s stand up special, but also their producing capabilities with Emmy award winning shows such as The Stranger Things. Netflix’s content experience service commands the largest domestic and international presence among its peers in an industry that still has room for exponential growth.

Business Segments

Netflix operates three business segments which include; International Streaming, Domestic streaming, and DVD-by-mail. The following graph represents the composition of Netflix’s revenue. As of December 31, 2017, Domestic and International make up the at 53% and 44% revenues respectively.

Source: Netflix Form 10-k 201720

DVD-by-mail subscribers have been dropping their subscription at a YOY rate of 18% since 2011 and they comprise 3% of Netflix’s revenue. Netflix has been gradually straying away from their DVD business segment to focus strictly on streaming. This move will help to cut distribution costs.19 We expect their DVD service to continue declining and ultimately be terminated by 2027.

Source: Netflix Form 10-k 201720

As the segment leader in revenue and once the only streaming segment on Netflix’s financials, domestic streaming plays a core role in Netflix’s long term strategy. However, we believe in 2027 Netflix will primarily grow their domestic revenues by pricing as opposed to subscriber additions. Reed Hastings has predicted that the market for media streaming in the US is 60-90 million people.33 With 54 million domestic subscribers, 2017 marks a year that brought Netflix closer to that saturation range. We predict Netflix will reach 88 million domestic subscribers by 2027.

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Percent of Revenues by Segment (2017)

Domestic International DVD by Mail

23%

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Percent of Revenues by Segment (2027E)

Domestic International

Company Analysis

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With a continuing improvement in the internet infrastructure in global markets and an already vast reach of 62 million international subscribers, we see the international segment as the catalyst the primary growth of growth going forward. Below is a timeline of Netflix’s expansion by country. Netflix announced global expansion to the rest of the world in 2016. Since then Netflix has averaged a YoY growth rate in subscribers of 45%. 20 We expect similar growth of about 40% next year and a gradual decrease to 5% by 2027.

Source: Netflix Form 10-k 201720

Content

Netflix will pay licensing fees to the producers in order to stream one of their shows or movies for a set period of time. They also bring production in house and license content to competitors as an additional source of revenue.

Netflix projects to spend to roughly $8 billion dollars on content in 201829 in addition to their current $17 billion dollar library of content assets.20 Netflix capitalizes their production and licensing costs and amortizes it over the asset’s estimated useful life. We project cost of revenues, which is primarily composed of amortization to maintain the 3 year average of 65% of sales in the next few years. As Netflix continues to capture subscribers and realize economies of scale through expanding its distribution network abroad, we expect a decrease of cost of revenues to about 45% of sales.

Marketing Strategy

Netflix projects to spend $2 billion dollars on marketing in 2018 in order to continue effectively penetrate global markets.28 The Company has an in-house programmatic buying team that uses big data to determine how and where to place their ads.26 Though costly, we feel this kind of individual specific marketing is worthwhile. For example, Netflix will position ads catering to target demographics within markets that have not been penetrated in order to access the initial consumer base.

Once their brand name gets noticed word of mouth plays a tremendous role in the addition of new subscribers.

Reed Hastings has been quoted saying that someday he sees a future where Netflix spends nothing on marketing, with content and word of mouth being the only thing needed to properly brand themselves.26 Although this projection is lofty we do expect to see a reduction in marketing costs. We believe this reduction will be driven by increased brand awareness and word of mouth, largely replacing the need for costly marketing and research. By 2027 we expect marketing expenses as a percent of sales to gradually drop from 13% to 3%.

Technology and Development

Netflix’s technology and development expenses consist of payroll, user face modification, streaming delivery technology and infrastructure, as well as research and development.

The largest portion of this expense is personnel costs.20 Netflix requires additional personnel to expand globally. Once they have sufficient operations abroad to fully penetrate the market, they will begin to experience economies of scale because payroll expense is largely a fixed cost. This will reduce technology and development costs in 2027 and beyond.

The second largest portion of this expense is attributable to cloud computing service that Netflix leases from Amazon. In 2016 Netflix developed the Spinnaker software which is an open source, multi-cloud continuous delivery platform.34 The purpose of Spinnaker is to reduce the cost collecting and managing data of cloud computing companies. Netflix provides Spinnaker to the cloud services it uses. Google and Amazon are the main proprietors of cloud storage and compete direct for customers. As Netflix continues to improve upon Spinnaker the cloud computing landscape will become cheaper and cheaper. This will directly lower the research and development portion of technology and development expenditure.

Along with an expected decrease R&D expense, we expect Netflix to benefit from increasing development in global internet infrastructure. As Netflix continues to expand they will realize increasing returns to scale as infrastructure improves. They won’t have to spend as much on improving technology and infrastructure. The graph below illustrates our forecasts for Technology and Development expenses from 2017 through

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2027. Ultimately, we feel this expense will decrease to 6.5% of sales.

EPS Forecast

Netflix is currently in the process of expanding globally. This requires heavy reinvestment within the firm, which explains why the firm pays no dividend. We believe that the reinvestment will lead to increased earnings in the long run as a result of the various cost benefits associated with economies of scale. We expect Netflix to continue increasing their subscriber base and attain a more efficient cost structure as they transition from the growth to the shakeout phase on the industry lifecycle.

Comparative Analysis of Competition

Market Share

Domestic markets are largely saturated which makes international expansion the primary means of growth.9

Fortunately, Netflix has operations in over 190 countries dwarfing the scale of competition with 62 million subscribers abroad. The largest source of growth will come from subscribers recommending Netflix by word of mouth.

Original Content

Netflix, Amazon Video, and Hulu all complete to create the hottest original content. Netflix has invested most heavily in the creation of original content in the past and plans to invest $8 billion in original content 2018 alone.29 However, Amazon has the largest budget to develop original content levering it’s position against Netflix. If Amazon decides to invest heavily in this segment it could pose a serious threat to Netflix. Hulu

develops the lowest volume of original content however what they have created has been very successful. For example, The Handmaid’s Tale swept the European market of its feet and which won the 2018 Golden Globe for best TV Series in the Drama category.11

Content

Amazon Video is the industry leader in movies but lacks in the television series. Netflix and Hulu excel in television series. Both companies produce highly rated content. In addition to television series Hulu offers customers the capability to stream music through partner Spotify and live television and sports.40 The bundle service termed, ‘Spotify Premium, now with Hulu’ provided by the partnership now allows customers to pay one fee for multiple forms of content. The new promotion in in trial and is expected to launch summer 2018.

TV Shows Movies

Netflix 1,041 3,712

Amazon Video 863 12,454

Hulu 1,264 1,429

Source: JustWatch44

Costs

Amazon Video offers is the cheapest for streaming HD content at 8.99 per month.13 Netflix has multiple pricing options allowing individuals and families alike to choose a package their suits their needs. Their lowest package starts at 10.99 per month. Hulu Plus starts at 11.99 per month14. Subscription service models compete directly against free services like YouTube and pirated content.

S.W.O.T.

Strengths

Original Content

In 2017 Netflix spent $6 billion dollars on content, much of which was dedicated toward original production. As competition increases, licensing cost will increase with it due to high demand. We feel Netflix recognizes the importance to not be completely reliant on licensing deals. Netflix is the leader in the original content category for media streaming with top shows like Orange is the New Black and Stranger Things. Its differentiation is evident of this in the 2018 SAG nominations.

Producer Netflix Amazon Hulu

SAG 2018 Nominations 19 0 2

Source: Variety 37

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Technology and Development / Sales

1.189.55

22.9331.36

0.00

10.00

20.00

30.00

40.00

Earnings per Share

11

Consumer Centric

Netflix creates a user-friendly interface so that viewers can easily navigate throughout the wide array of content. Content is organized by trends, popularity, and personal preferences catered to what you have previously watched.

Source: Business Standard21

Media and entertainment is becoming more and more personalized as companies are able to harness data regarding the individual rather than the household. Netflix is able to create a welcoming customer experience via Amazon Web Services.25 For example, one household may have an account for the parents and an account for the kids. AWS will store their data separately and thus Netflix can present Orange is the New Black for “recommendations” to the parents, and a cartoon show for the kids. 25

Open Connect

Originally, Netflix had to pay third party Content Delivery Networks (CDN) in order to work with Internet Service Providers like Comcast to stream directly to households.27 Through the development of their own CDN ‘Open Connect’ Netflix can now work directly with the internet service providers without a middleman. ‘Open Connect’ streamlines the content delivery process, reduces costs, and improves working relationships with internet service providers.

The below shows the footprint of ‘Open Connect’. Orange dots represent internet exchange points and green dots represent ISP locations.

Source: Netflix 201727

As internet infrastructures expands globally, we expect the volume of ISP and Open Connect to expand as well. This would mean streamlined content delivery and reduced costs.

Weakness

Contractual Obligations

Suppliers have upper hand when it comes to negotiating content licensing contracts. Producers can adjust the duration and exclusivity of individual licensing arrangements as they see fit. This means that suppliers are able to charge higher prices for exclusive rights and longer contracts. Suppliers lock Netflix into arrangement while they often maintain the exclusive right to withdraw the content rights on short notice. The risk are even greater because Netflix finances these arrangement through the high yield market. Below is what Netflix reported to be their obligations as of fiscal year end 2017. Source: Netflix 10-k 201720

Netflix has to set aside cash dedicate to the renewal of content successful content obligations. Because of this a large amount of their capital is tied up in arrangement they cannot easily exit. Netflix subscriber could close their subscription at any point in time leaving Netflix vulnerable to credit default. They cannot protect against this tail risk because they require more content to expand into the global market.

Opportunities

International Growth

Netflix already has dominance in the domestic arena. With less to worry about at home Netflix can devote time and resource toward international growth. With a large footprint in 190 countries most of their growth will be generated through word of mouth, we expect the improvement in internet infrastructure, targeted marketing, and content differentiation to assist word of mouth in the proliferation of subscribers.

Furthermore, the international contribution margins which is sales less COGS and Marketing expense over sales of international operations has turned profit for the first time in 2017. Considering our projections for cost of revenues, technology and development, and marketing expenditure we are confident that their high cost growth strategy will continue to pump out profits in years to come.

12

Source: Netflix 10-k 201720

Integration

Netflix’s consumer reach provides a large incentive for other companies to package and bundle deals with the media giant. For example, Apple has already taken advantage of this promotional opportunity. Every Apple TV is automatically equipped with Netflix.38 The largest broadcast and cable television provider Comcast equipped their X1 platforms with Netflix in 2016.39 Comcast customers are able to subscribe to Netflix and pay a single bill through Comcast. The simplification of bundle services help reach the older demographics that are used to satellite television.39 Partnerships like this will provide Netflix penetrate difficult market segments.

Interest Rates Increasing

Current Federal Reserve Chairman Jerome Powell announced in February that he expects to see gradual rate hikes throughout 2018.41 Provided out optimistic short run forecast of real gross domestic product we believe there will be four rate hikes in 2018. As of fiscal year end 2017 Netflix has $6.5 billion in unsecured long term callable plain vanilla B+ debt.20 As interest rates increase Netflix will benefit the devaluation of the dollar.

Source: Netflix 10-k 201720

Threats

Competition

The profitability of the media streaming industry is attracting mature companies with large budgets. These companies have more resources to create a differentiated product that can compete directly with Netflix. Disney has announced the

opening of a new streaming segment in set to release 2019. Disney announced in their most recent earnings call that they intend to pull 100% of their content from Netflix to support the development of their streaming segment. This is a serious threat to Netflix. If more firms follow in Disney’s footsteps Netflix will have to depend solely on their original production.

Currency fluctuations

Currency fluctuations are a threat to profitability. Netflix realized a $140.8 million dollar loss from appreciation of non-US and European debt obligations in 2017.20 International revenues subject to depreciation. Management of currency risk is an inexact science involving large amount of uncertainty. We expect currency fluctuation to remain a constant threat.20

Revenue Growth Revenue is a function of the number of paying subscribers multiplied by the price of a subscription. We utilized management’s guidance of 60-90 million domestic subscribers at saturation as our guidance for forecasting subscriber growth. We believe Netflix will saturate the domestic market at roughly 82 million subscribers by 2022.

Additionally, with 62 million international subscribers we believe Netflix still has much room to grow abroad. We project their current expansionary strategy and global internet infrastructure improvements to propel them to an international subscriber base of 435 million by 2027.

Cost of Revenues Netflix’s largest costs are those associated with the production, licensing, and streaming of content. Cost of revenues consist of a large percentage of sales to attract and retain subscribers. We expect their cost of revenues to remain at high levels, then decrease as Netflix creates customer loyalty and recognizes distribution efficiencies abroad.

Content Library We see Netflix’s content library increasing to remain competitive. As Netflix continues to gain momentum in the international market, there is a large amount of resources dedicated to content creation in the next 3 years. We believe Netflix will need to continue this growth in order to continue to gain subscribers.

Other Operating Expenses We recognize Netflix’s industry as being in the growth phase of the life cycle. Netflix is a fast growing company, establishing dominance both domestically and abroad. We are assuming an initial cost structure higher than that of its continuing value phase. Eventually, we feel Netflix will recognize economies scale and generate revenue in more efficient ways.

-50% -40% -30% -20% -10% 0% 10%

2017

2016

2015

2014

2013

International Contribution Margin

Valuation Analysis

13

Capital Structure Netflix is continuing to dedicate resources toward expanding throughout the world. The byproduct of this strategy is a high cost structure and negative free cash flow. Netflix is able to pursue aggressive growth through its high yield debt financing. We expect Netflix to maintain their current capital structure in order to achieve their global ambitions.

Weighted Average Cost of Capital (WACC) We calculated a WACC of 10.65 %. The WACC includes an equity market weight of 95.26 %, and a weight of debt of 5.74%.

Cost of Debt Our 4.88% cost of debt was derived from adding Netflix’s B+ bond risk premium to the risk free rate of 3.07%. The risk free rate was the rate of a 30 year treasury bond.

Cost of Equity We calculated the cost of equity using the Capital Asset Pricing Model (CAPM). We used a beta of 1.7 which was derived from Bloomberg’s raw 4 year weekly beta. We used such a time serious because we believed it was an appropriate reflection of Netflix’s risk as they have continued expanding the past four years.

Beta: 1.9

Market Risk Premium: 4.6 %

Risk Free Rate: 3.07 %

Valuation Models Our primary means of modelling included DCF and Economic Profit valuations, relative valuations, and dividend discount model.

Dividend Discount Model

The dividend discount model valued Netflix at $166.50. Netflix does not distribute dividends to its shareholders. This model provides an obsolete intrinsic value.

Discounted Cash Flow and Economic Profit Model

The discounted cash flow and economic profit model produced an intrinsic value of $390.54. We believe this to be the proper intrinsic value of the stock. Free cash flow remains negative until 2019, then reverses course toward a value of $17 billion in 2027. This aligns with our view point that Netflix’s short term growth strategy will lead to substantial pay offs in the long run. We believe Netflix’s continuing value growth of 6% is reflective of their ability to establish a dominant market share in domestic and international markets.

Relative Valuation

We compared Netflix’s P/E, EPS, and PEG to Amazon, Disney, and Time Warner. None of these companies are pure play comparison since they have business segments outside of online media streaming. Thus, we chose our comparable companies that most closely aligned with Netflix’s size and scope. The metrics that stand out the most to us are Netflix’s EPS and its

PEG ratio. Netflix has EPS lower than that of other companies. We believe this is indicative of Netflix’s current growth strategy. As they are plowing money back into their growing operations they are incurring high costs and thus lower earnings. We expect Netflix to eventually grow their EPS as they exit the growth phase. However, this growth may already be priced in the market seeing that their PEG ratio is abnormally high. We view this high valuation as the biggest risk to our investment thesis. Never the less, we have confidence in Netflix’s ability to realize the growth they are projecting, ultimately meeting the markets expectations.

Domestic Subscriber Growth vs. International Subscriber Growth We tested the Domestic Subscriber Growth to the International Subscriber Growth to observe how price was affected by these changes. We found that price is more sensitive to changes in International Subscriber Growth than Domestic Subscriber Growth.

Pre-tax cost of debt vs. Beta We tested the Beta vs. the Pre-Tax cost of debt to observe how price was affected by these changes. We found that the price is more sensitive to data, due to the fact that beta measures volatility and correlation with the market.

Marginal Tax Rate vs. Cost of Equity We tested the Cost of Equity to the Marginal Tax Rate to observe how price was affected by these changes. We found that a decrease in the marginal tax rate will increase the price of Netflix. We also found that the price is most sensitive to the Cost of Equity due to the fact that it represents the return that the market demands for owning the asset.

Sensitivity Analysis

14

Technology / Sales vs. Cost of Revenues / Sales We tested the Technology/Sales vs. Cost of Revenues/Sales to observe how price was affected by these changes. We found that price is almost equally sensitive to these two values because they both correlate with producing new content.

Long Term Debt / (Beg. Total Assets – Cash) vs Content Assets / Sales We tested the Long Term Debt / (beg. Total assets – cash) vs. Content Assets / Sales to observe how price was affected by these changes. We found that price was approximately equally sensitive to these two assumptions.

15

Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. 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 Krause Fund may hold a financial interest in the companies mentioned in this report.

NetflixKey Assumptions of Valuation Model

Ticker Symbol NFLXcommon shares outstanding at beginning of the year 433.95Current Share Price 332.00$ Current Model Date 4/17/2018FY End (month/day) Dec. 31

Pre-Tax Cost of Debt 4.88%Beta 1.7Risk-Free Rate 3.07%Equity Risk Premium 4.60%CV Growth of NOPLAT 3.00%CV Growth of EPS 4.50%Current Dividend Yield 0.00%Marginal Tax Rate 27.00%Effective Tax Rate 27.00%WACC 10.56%Cost of Equity 10.89300%Cost of Debt 4.88%Cost of Lease 3.86%

NetflixRevenue Decomposition (in millions)

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024EGlobal RevenuesTotal $ 6,779.51 $ 8,830.67 $ 11,692.71 $ 16,297.63 $ 20,366.26 $ 25,026.87 $ 30,286.72 $ 35,619.68 $ 40,745.81 $ 45,512.64 Growth %, YoY 23.2% 30.3% 32.4% 39.4% 25.0% 22.9% 21.0% 17.6% 14.4% 11.7%Domestic Revenue $ 4,180.34 $ 5,077.31 $ 6,153.03 $ 7,702.19 $ 8,873.34 $ 9,989.64 $ 11,099.89 $ 11,786.22 $ 11,904.08 $ 12,023.12 Net membership additions 5.624 4.693 5.319 5.585 5.864 6.157 6.465 3.233 0.000 0.000 Memberships at end of period 44.738 49.431 54.75 60.335 66.199 72.357 78.822 82.054 82.054 82.054 Paid Memberships at end of period 43.401 47.905 52.81 57.318 62.889 68.739 74.881 77.952 77.952 77.952 Average monthly revenue pre paying subscriber $ 8.50 $ 9.21 $ 10.18 $ 11.20 $ 11.76 $ 12.11 $ 12.35 $ 12.60 $ 12.73 $ 12.85 % of Revnues 61.7% 57.5% 52.6% 47.3% 43.6% 39.9% 36.6% 33.1% 29.2% 26.4%International Revenue $ 1,953.44 $ 3,211.10 $ 5,089.19 $ 8,284.33 $ 11,258.60 $ 14,875.60 $ 19,094.73 $ 23,807.87 $ 28,841.73 $ 33,489.52 Net membership additions 11.747 14.341 18.467 24.007 30.009 36.011 41.412 45.553 47.831 43.048 Memberships at end of period 30.024 44.365 62.832 86.839 116.848 152.859 194.271 239.824 287.655 330.704 Paid Memberships at end of period 27438 41.185 57.834 78.155 105.163 137.573 174.844 215.842 258.890 297.633 Average monthly revenue pre paying subscriber $ 7.48 $ 7.81 $ 8.66 $ 8.83 $ 8.92 $ 9.01 $ 9.10 $ 9.19 $ 9.28 $ 9.38 % of Revenues 28.8% 36.4% 43.5% 50.83% 55.28% 59.44% 63.05% 66.84% 70.78% 73.58%DVD Revenue $ 645.74 $ 542.27 $ 450.50 $ 311.11 $ 234.32 $ 161.63 $ 92.09 $ 25.59 $ 0.00 $ 0.00 Net membership additions -0.863 -0.790 -0.731 -0.694 -0.660 -0.627 -0.602 -0.578 -0.223 0.000 Memberships at end of period 4.904 4.114 3.383 2.689 2.029 1.402 0.800 0.223 0.000 0.000 Paid Memberships at end of period 4.787 4.029 3.330 2.554 1.927 1.332 0.760 0.212 0.000 0.000 Average monthly revenue pre paying subscriber $ 10.30 $ 10.22 $ 10.17 $ 10.15 $ 10.13 $ 10.11 $ 10.09 $ 10.07 $ 10.05 $ 10.05 % of Revenues 9.5% 6.1% 3.9% 1.91% 1.15% 0.65% 0.30% 0.07% 0.00% 0.00%

NetflixIncome Statement

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024ERevenues 6779.511 8830.669 11692.713 16,297.63 20,366.26 25,026.87 30,286.72 35,619.68 40,745.81 45,512.64 Total Cost of Revnues (4,529.193) (5,972.373) (7,587.755) (10,593.46) (13,238.07) (15,016.12) (16,657.69) (17,809.84) (18,335.62) (20,480.69)

Other operating costs (1,044.431) (1,104.923) (1,329.281) (2,436.50) (2,647.61) (3,003.22) (3,331.54) (3,561.97) (3,667.12) (4,096.14)Amortization (3,484.762) (4,867.450) (6,258.474) (8,156.96) (10,590.46) (12,012.90) (13,326.16) (14,247.87) (14,668.49) (16,384.55)Depreciation (62.283) (57.528) (71.911) (113.91) (102.00) (246.77) (167.35) (93.45) (136.20) (160.75)

Marketing (824.092) (991.078) (1,278.022) (2,118.69) (2,240.29) (2,252.42) (2,120.07) (2,137.18) (2,037.29) (1,820.51) Technology and development (650.788) (852.098) (1,052.778) (1,385.30) (1,731.13) (2,002.15) (2,422.94) (2,671.48) (3,055.94) (3,185.88) General and administrative (407.329) (577.799) (863.568) (1,140.83) (1,425.64) (1,751.88) (2,120.07) (2,493.38) (2,852.21) (3,185.88)Operating income 305.826 379.793 838.679 945.44 1,629.13 3,757.53 6,798.60 10,414.36 14,328.57 16,678.93 Other income / expense

Interest expense (132.716) (150.114) (238.204) (317.17) (268.62) (352.14) (445.95) (364.79) (418.46) (458.31) Interest and other income / expense (31.225) 30.828 (115.154) 107.19 2.84 47.59 254.31 328.41 603.73 994.01 Loss on extinguishment of debt - - - - - - - - - -

Income before income taxes 141.885 260.507 485.321 735.46 1,363.35 3,452.98 6,606.95 10,377.98 14,513.84 17,214.62 (Provision for)benefit from income taxes (19.244) (73.829) 73.608 (154.45) (286.30) (725.13) (1,387.46) (2,179.38) (3,047.91) (3,615.07)Net income 122.641 186.678 558.929 581.01 1,077.05 2,727.85 5,219.49 8,198.61 11,465.93 13,599.55

Weighted-average common shares outstanding: Basic 425.889 428.822 431.885 451.30 468.65 486.01 503.36 520.71 538.06 555.41

NetflixBalance Sheet

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024EAssetsCurrent Assets: Cash 1,809.33 1,467.58 2,822.80 74.92 1,253.17 6,696.90 8,648.42 15,898.72 26,176.18 39,712.56

Normal cash 27.14 22.01 42.34 1.12 18.80 100.45 129.73 238.48 392.64 595.69 Excess cash 1,782.19 1,445.56 2,780.45 73.79 1,234.37 6,596.45 8,518.69 15,660.24 25,783.54 39,116.87

Short-term investments 501.39 266.21 - - - - - - - - Other current assets 215.13 260.20 536.25 554.12 692.45 850.91 1,029.75 1,211.07 1,385.36 1,547.43 Total Current Assets 5,431.84 5,720.29 7,669.97 629.04 1,945.62 7,547.81 9,678.16 17,109.79 27,561.54 41,259.99 Total Content Assets, Net 7,218.82 11,000.81 14,681.99 19,557.15 24,439.51 25,026.87 28,772.38 33,838.69 38,708.52 43,237.01 Gross Property and equipment 470.76 500.79 638.81 1,059.35 1,227.28 1,251.34 1,211.47 1,424.79 1,629.83 1,365.38 Accumulated depreciation 297.35 250.40 319.40 433.31 535.31 782.08 949.43 1,042.88 1,179.07 1,339.82 Net, Property and equipment 173.41 250.40 319.40 286.02 691.97 469.26 262.04 381.91 450.76 25.56

Net, Deferred tax assets 180.57 227.25 478.27 614.28 788.97 1,013.33 1,301.51 1,671.64 2,147.02 2,757.60 Other non-current assets 104.23 114.18 174.04 211.87 264.76 325.35 393.73 463.06 529.70 591.66 Total Assets 10,202.87 13,586.61 19,012.74 21,298.36 28,130.83 34,382.63 40,407.82 53,465.08 69,397.54 87,871.82 Liabilities and Stockholers' EquityCurrent Liabilities: Accounts payable 253.49 312.84 359.56 651.91 814.65 1,001.07 1,211.47 1,424.79 1,629.83 1,820.51 Accrued expenses 140.39 197.63 315.09 407.44 509.16 625.67 757.17 890.49 1,018.65 1,137.82 Deferred revenue 346.72 443.47 618.62 831.18 1,038.68 1,276.37 1,544.62 1,816.60 2,078.04 2,321.14 Total Current Liabilities 3,529.62 4,586.66 5,466.31 1,890.52 2,362.49 2,903.12 3,513.26 4,131.88 4,726.51 5,279.47 Total Content Liabilities, Net 4,815.38 6,527.37 7,502.84 8,963.70 11,201.44 11,262.09 12,114.69 14,247.87 16,298.32 18,205.05 Long-term debt 2,371.36 3,364.31 6,499.43 5,504.58 7,215.97 9,138.41 7,475.15 8,575.04 9,391.59 10,805.34 Long-term debt due to related party - - - - - - - - - - Other non-current liabilities 52.10 61.19 135.25 162.98 203.66 250.27 302.87 356.20 407.46 455.13 Total Liabilities 7,979.45 10,906.81 15,430.79 16,521.78 20,983.56 23,553.88 23,405.96 27,310.99 30,823.89 34,744.99 Stockholders equity Common stock 1,324.81 1,599.76 1,871.40 2,825.02 3,778.65 4,732.27 5,685.90 6,639.52 7,593.15 8,546.78 Accumulated other comprehensive loss / income (43.31) (48.57) (20.56) (20.56) (20.56) (20.56) (20.56) (20.56) (20.56) (20.56) Retained earnings / accumulated deficit 941.93 1,128.60 1,731.12 2,312.13 3,389.18 6,117.03 11,336.52 19,535.13 31,001.06 44,600.61 Total Stockholders’ Equity 2,223.43 2,679.80 3,581.96 5,116.60 7,147.27 10,828.75 17,001.86 26,154.09 38,573.65 53,126.83 Total Liabilities and Stockholders’ Equity 10,202.87 13,586.61 19,012.74 21,638.37 28,130.83 34,382.63 40,407.82 53,465.08 69,397.54 87,871.82

NetflixCash Flow Statement

Fiscal Years Ending Dec. 31 2015 2016 2017Cash flows from operating activites:Net income 122.64 186.68 558.93 Adjustments to reconcile net income to net cash used in operations: Additions to streaming content assets (5,771.65) (8,653.29) (9,805.76) Change in streaming content liabilities 1,162.41 1,772.65 900.01 Amortization of content 3,484.76 4,867.45 6,258.47 Depreciation & amortization of property, equipment & intangibles 62.28 57.53 71.91 Stock-based compensation expense 124.73 173.68 182.21 Excess tax benefits from stock-based compensation (80.47) (65.12) - Other non-cash items 31.63 40.91 57.21 Loss on extinguishment of debt - - - Foreign currency remeasurement loss on long-term debt - - 140.79 Deferred taxes (58.66) (46.85) (208.69) Changes in operating assets and liabilities: Other current assets 18.69 46.97 (234.09) Accounts payable 51.62 32.25 74.56 Accrued expenses 48.81 68.71 114.34 Deferred revenue 72.14 96.75 177.97 Prepaid content - - - Other non-current assets and liabilities (18.37) (52.29) (73.80) Net cash used in operating activities (749.44) (1,473.98) (1,785.95) Cash flows from investing activities:Acquisition of DVD content assets (77.96) (77.18) (53.72) Purchases of property and equipment (91.25) (107.65) (173.30) Investment in business - - - Proceeds from sale of business - - - Other assets (1.91) (0.94) (6.69) Purchases of short-term investments (371.92) (187.19) (74.82) Proceeds from sale of short-term investments 259.08 282.48 320.15 Proceeds from maturities of short-term investments 104.76 140.25 22.71 Net cash provided by (used in) investing activities (179.19) 49.77 34.33 Cash flows from financing activites:Proceeds from issuance of debt, net of issuance costs 1,482.37 989.30 2,988.36 Proceeds from public offering of common stock, net of issuance costs 77.98 36.98 88.38 Proceedes from public offering of publick stock, net of issuance costs - - - Excess tax benefits from stock-based compensation 80.47 65.12 - Other financing activities (0.55) 0.23 0.26 Repurchases of common stock - - - Redemption of debt - - - Net cash provided by financing activities 1,640.28 1,091.63 3,076.99 Effect of exchange rate changes on cash and cash equivalents (15.92) (9.17) 29.85 Net increase (decrease) in cash and cash equivalents 695.72 (341.75) 1,355.22 Cash and Cash Equivalents, beginning of the year 1,113.61 1,809.33 1,467.58 Cash and Cash Equivalents, end of the year 1,809.33 1,467.58 2,822.80 Supplemental disclosureIncome taxes paid (27.66) (26.81) (113.59) Interest paid (111.76) (138.57) (213.31)

NetflixCash Flow Statement

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E 2023E 2024ECash flows from operating activites:Net income 581.01 1,077.05 2,727.85 5,219.49 8,198.61 11,465.93 13,599.55 adjustment to reconcile cash from net incomeDepreciation expense 113.91 102.00 246.77 167.35 93.45 136.20 160.75 Short-term investments - - - - - - - Other current assets (17.87) (138.33) (158.46) (178.83) (181.32) (174.29) (162.07)Content Asssets (4,875.17) (4,882.36) (587.35) (3,745.51) (5,066.31) (4,869.83) (4,528.48)Net, Deferred tax assets (136.01) (174.69) (224.37) (288.18) (370.13) (475.38) (610.58)Accounts payable 292.35 162.75 186.42 210.39 213.32 205.05 190.67 Accrued expenses 92.35 101.72 116.52 131.50 133.32 128.15 119.17 Deferred revenue 212.56 207.50 237.69 268.25 271.98 261.43 243.11 Content Liabilities 1,460.86 2,237.75 60.65 852.60 2,133.18 2,050.45 1,906.73 Net cash used in operating activities (2,276.02) (1,306.62) 2,605.72 2,637.05 5,426.10 8,727.71 10,918.85 Cash flows from investing activities:Capital expenditures (420.54) (167.94) (24.06) 39.87 (213.32) (205.05) 264.45 Other non-current assets (37.83) (52.89) (60.59) (68.38) (69.33) (66.64) (61.97)Net cash provided by (used in) investing activities (458.36) (220.83) (84.65) (28.50) (282.65) (271.69) 202.48 Cash flows from financing activites:Long-term debt (994.85) 1,711.39 1,922.44 (1,663.26) 1,099.89 816.55 1,413.75 Other non-current liabilities 27.73 40.69 46.61 52.60 53.33 51.26 47.67 Common stock 953.63 953.63 953.63 953.63 953.63 953.63 953.63 Net cash used in financing activities (13.49) 2,705.70 2,922.67 (657.04) 2,106.85 1,821.44 2,415.04 Net increase (decrease) in cash and cash equivalents (2,747.88) 1,178.25 5,443.73 1,951.51 7,250.30 10,277.47 13,536.38 Cash and Cash Equivalents, beginning of the year 2,822.80 74.92 1,253.17 6,696.90 8,648.42 15,898.72 26,176.18 Cash and Cash Equivalents, end of the year 74.92 1,253.17 6,696.90 8,648.42 15,898.72 26,176.18 39,712.56

NetflixCommon Size Income Statement

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024ERevenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of revenues 15.41% 12.51% 11.37% 20.12% 36.22% 65.20% 117.35% 211.23% 380.22% 684.40%

Amortization 51.40% 55.12% 53.52% 50.05% 52.00% 48.00% 44.00% 40.00% 36.00% 36.00%Depreciation 0.92% 0.65% 0.62% 0.70% 0.50% 0.99% 0.55% 0.26% 0.33% 0.35%Marketing 12.16% 11.22% 10.93% 13.00% 11.00% 9.00% 7.00% 6.00% 5.00% 4.00%Technology and development 9.60% 9.65% 9.00% 8.50% 8.50% 8.00% 8.00% 7.50% 7.50% 7.00%General and administrative 6.01% 6.54% 7.39% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%

Operating income 4.51% 4.30% 7.17% 5.80% 8.00% 15.01% 22.45% 29.24% 35.17% 36.65%Other income / expense

Interest expense 1.96% 1.70% 2.04% 1.95% 1.32% 1.41% 1.47% 1.02% 1.03% 1.01% Interest and other income / expense 0.46% 0.35% 0.98% 0.66% 0.01% 0.19% 0.84% 0.92% 1.48% 2.18% Loss on extinguishment of debt 0.00% 0.00% 0.00%

Income before income taxes 2.09% 2.95% 4.15% 4.51% 6.69% 13.80% 21.81% 29.14% 35.62% 37.82%(Provision for) benefit from income taxes 0.28% 0.84% 0.63% 0.95% 1.41% 2.90% 4.58% 6.12% 7.48% 7.94%Net income 1.81% 2.11% 4.78% 3.57% 5.29% 10.90% 17.23% 23.02% 28.14% 29.88%

NetflixCommon Size Balance Sheet%SalesFiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024EAssetsCurrent Assets: Cash 26.69% 16.62% 24.14% 0.46% 6.15% 26.76% 28.56% 44.63% 64.24% 87.26%

Normal cash 0.40% 0.25% 0.36% 0.01% 0.09% 0.40% 0.43% 0.67% 0.96% 1.31%Excess cash 26.29% 16.37% 23.78% 0.45% 6.06% 26.36% 28.13% 43.97% 63.28% 85.95%

Short-term investments 7.40% 3.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other current assets 3.17% 2.95% 4.59% 3.40% 3.40% 3.40% 3.40% 3.40% 3.40% 3.40%Total Current Assets 80.12% 64.78% 65.60% 3.86% 9.55% 30.16% 31.96% 48.03% 67.64% 90.66%Total Content Assets, Net 106.48% 124.58% 125.57% 120.00% 120.00% 100.00% 95.00% 95.00% 95.00% 95.00%Gross Property and equipment 6.94% 5.67% 5.46% 6.50% 6.03% 5.00% 4.00% 4.00% 4.00% 3.00%Accumulated depreciation 4.39% 2.84% 2.73% 2.66% 2.63% 3.12% 3.13% 2.93% 2.89% 2.94%Net, Property and equipment 2.56% 2.84% 2.73% 1.76% 3.40% 1.88% 0.87% 1.07% 1.11% 0.06%

Net, Deferred tax assets 2.66% 2.57% 4.09% 3.77% 3.87% 4.05% 4.30% 4.69% 5.27% 6.06% Other non-current assets 1.54% 1.29% 1.49% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%Total Assets 150.50% 153.86% 162.60% 130.68% 138.12% 137.38% 133.42% 150.10% 170.32% 193.07%Liabilities and Stockholers' EquityCurrent Liabilities: Accounts payable 3.74% 3.54% 3.08% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% Accrued expenses 2.07% 2.24% 2.69% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Deferred revenue 5.11% 5.02% 5.29% 5.10% 5.10% 5.10% 5.10% 5.10% 5.10% 5.10%Total Current Liabilities 52.06% 51.94% 46.75% 11.60% 11.60% 11.60% 11.60% 11.60% 11.60% 11.60%Total Content Liabilities, Net 71.03% 73.92% 64.17% 55.00% 55.00% 45.00% 40.00% 40.00% 40.00% 40.00%Long-term debt 34.98% 38.10% 55.59% 33.78% 35.43% 36.51% 24.68% 24.07% 23.05% 23.74%Long-term debt due to related party 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other non-current liabilities 0.77% 0.69% 1.16% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Total Liabilities 117.70% 123.51% 131.97% 101.38% 103.03% 94.11% 77.28% 76.67% 75.65% 76.34%Stockholders equity Common stock 19.54% 18.12% 16.00% 17.33% 18.55% 18.91% 18.77% 18.64% 18.64% 18.78% Accumulated other comprehensive loss / income -0.64% -0.55% -0.18% -0.13% -0.10% -0.08% -0.07% -0.06% -0.05% -0.05% Retained earnings / accumulated deficit 13.89% 12.78% 14.81% 14.19% 16.64% 24.44% 37.43% 54.84% 76.08% 98.00%Total Stockholders’ Equity 32.80% 30.35% 30.63% 31.39% 35.09% 43.27% 56.14% 73.43% 94.67% 116.73%Total Liabilities and Stockholders’ Equity 150.50% 153.86% 162.60% 132.77% 138.12% 137.38% 133.42% 150.10% 170.32% 193.07%

NetflixValue Driver Estimation

Fiscal Years Ending Dec. 31 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025 2026 2027NOPLATRevenue 8830.669 11692.713 16297.629 20366.262 25026.868 30286.716 35619.676 40745.812 45512.637 49930.427 54031.793 57273.648 Other operating Costs -1104.923 -1329.281 -2436.495 -2647.614 -3003.224 -3331.539 -3561.968 -3667.123 -4096.137 -4493.738 -4322.543 -4581.892 Marketing -991.078 -1278.022 -2118.692 -2240.289 -2252.418 -2120.070 -2137.181 -2037.291 -1820.505 -1997.217 -2161.272 -1718.209 Technology and Development -852.098 -1052.778 -1385.298 -1731.132 -2002.149 -2422.937 -2671.476 -3055.936 -3185.885 -3495.130 -3512.067 -3722.787 General and Administrative -577.799 -863.568 -1140.834 -1425.638 -1751.881 -2120.070 -2493.377 -2852.207 -3185.885 -3495.130 -3782.226 -4009.155 Depreciation -57.528 -71.911 -113.905 -102.001 -246.770 -167.348 -93.449 -136.196 -160.749 -9.114 -53.128 -78.060 Amortization -4867.450 -6258.474 -8156.963 -10590.456 -12012.897 -13326.155 -14247.871 -14668.492 -16384.549 -17974.954 -17290.174 -18327.567 Interest on Operating Leases 19.962 24.369 29.183 35.311 42.726 51.699 62.555 75.692 91.587 110.821 134.093 162.253EBITA 399.755 863.048 974.623 1664.442 3800.256 6850.296 10476.911 14404.259 16770.514 18575.965 23044.477 24998.230Total Adjusted Taxes -18.572 171.959 198.543 342.118 789.081 1427.705 2187.015 3008.999 3502.575 3877.680 4811.181 5215.555Change in Deferred Taxes -46.675 -251.018 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000NOPLAT 371.652 440.071 776.081 1322.325 3011.174 5422.590 8289.897 11395.260 13267.939 14698.284 18233.297 19782.675

Invested CapitalWorking Capital Cash and cash equivalents 22.014 42.342 1.124 18.797 100.454 129.726 238.481 392.643 595.688 814.117 1092.158 1402.579 Accounts payable -312.842 -359.555 -651.905 -814.650 -1001.075 -1211.469 -1424.787 -1629.832 -1820.505 -1997.217 -2161.272 -2290.946 Accrued expenses -197.632 -315.094 -407.441 -509.157 -625.672 -757.168 -890.492 -1018.645 -1137.816 -1248.261 -1350.795 -1431.841 Deferred revenue -443.472 -618.622 -831.179 -1038.679 -1276.370 -1544.623 -1816.603 -2078.036 -2321.144 -2546.452 -2755.621 -2920.956Net PPE 250.395 319.404 286.023 691.972 469.264 262.041 381.911 450.760 25.558 148.977 218.890 238.086Content Assets, Net 11000.808 14681.989 19557.154 24439.515 25026.868 28772.380 33838.692 38708.522 43237.005 47433.906 51330.203 54409.966PV of Operating Leases 499.361 598.004 723.585 875.538 1059.401 1281.875 1551.068 1876.793 2270.919 2747.812 3324.853 4023.072Content Liabilities, Net -6527.365 -7502.837 -8963.696 -11201.444 -11262.091 -12114.686 -14247.871 -16298.325 -18205.055 -19972.171 -21612.717 -22909.459Invested Capital 4291.266 6845.631 9713.666 12461.891 12490.778 14818.077 17630.400 20403.878 22644.650 25380.712 28085.699 30520.500

ROIC 0.164 0.103 0.113 0.136 0.242 0.434 0.559 0.646 0.650 0.649 0.718 0.704

Econmic Profit 131.688 -13.074 53.202 296.590 1695.235 4103.600 6725.151 9533.541 11113.349 12307.075 15553.167 16816.906

FCF -1647.172 -2114.293 -2091.954 -1425.901 2982.287 3095.292 5477.574 8621.782 11027.168 11962.222 15528.310 17347.874

NetflixWeighted Average Cost of Capital (WACC) Estimation

Cost of Equity 10.89300%% of Equity in Capital Structure 95.26%

Risk Free 3.073%Risk Premium 4.60%Beta 1.7

Pretax Cost of Debt 4.880%Cost of Debt 3.86%% of Debt in Capital Structure 4.69%

Market Value of Company $144,071.40Value of Debt $7,097.44PV of lease $64.50Value of Company $151,233.34

WACC 10.56%

NetflixDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:Domestic 0% CV Growth 6.10%International 8% CV ROIC 0DVD 0% WACC 0CV Growth 6.099629614536300% Cost of Equity 0CV ROIC 70.44%WACC 10.56%Cost of Equity 10.89%CV ROE 17.85%

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025 2026 2027(CV)DCF Model

Free Cash Flow (2,091.95) (1,425.90) 2,982.29 3,095.29 5,477.57 8,621.78 11,027.17 11,962.22 15,528.31 Continuing Value 405,139.42 PV of FCF (1,892.15) (1,166.53) 2,206.78 2,071.64 3,315.92 4,720.80 5,461.17 5,358.42 6,291.47 164,146.80

Value of Operating Assets 190514.315Excess Cash 2780Debt -6499PV of operating leases -598ESOP -22563Value of Equity 163634Shares Outstanding 432Intrinsic Value (per share) 390.54

Fiscal Years Ending 0.038552 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025 2026 2027(CV)EP Model

Economic Profit to Discount 53.20 296.59 1,695.23 4,103.60 6,725.15 9,533.54 11,113.35 12,307.07 15,553.17 Continuing Value 377,053.72 PV of FCF Discounted by WACC 48.12 242.64 1,254.41 2,746.49 4,071.15 5,220.03 5,503.85 5,512.89 6,301.54 152,767.56

PV [Economic Profit] 183669Beginning invested capital 6846Value of Operating Assets 190514Excess Cash 2780.453075Debt -6499.432PV of operating leases -598.0040321ESOP -22563.44379Value of Equity 163633.8885Shares Outstanding 431.885Intrinsic Value (per share) 390.54

NetflixDividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

EPS 1.29$ 2.30$ 5.61$ 10.37$ 15.75$ 21.31$ 24.49$ 26.82$ 32.64$ 35.05$

Key Assumptions CV growth 3.00% CV ROE 17.85% Cost of Equity 10.89%

Future Cash Flows P/E Multiple (CV Year) 11.68855 EPS (CV Year) 35.05$ Future Stock Price 409.64$ Discounted Cash Flows 161.5334Current forward P/E Multiple 70.29Current share price 332.00$

Intrinsic Value 166.50$

NetflixKey Management Ratios

Fiscal Years Ending 2015.00 2016.00 2017.00 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Liquidity Ratioscurrent ratio = CA/CL 1.54 1.25 1.40 0.33 0.82 2.60 2.75 4.14 5.83 7.82quick ratio = [CA-INV]/CL 1.54 1.25 1.40 0.33 0.82 2.60 2.75 4.14 5.83 7.82cash ratio = Cash/CL 0.51 0.32 0.52 0.04 0.53 2.31 2.46 3.85 5.54 7.52net working capital = CA-CL 1902.22 1133.63 2203.66 -1261.49 -416.87 4644.70 6164.90 12977.91 22835.03 35980.53fixed charge coverage = [EBIT+LEASE PAYMENTS]/[INTEREST PAYMENTS+LEASE 1.28 1.30 1.80interest coverage = EBIT/ interest expense 2.30 2.53 3.52 2.98 6.06 10.67 15.25 28.55 34.24 36.39Activity or Asset-Management RatiosAsset Turnover Ratio =SALES/ATA 0.74 0.72 0.81 0.82 0.80 0.81 0.76 0.66 0.58Accounts Payable Turnover = Purchases/AVE.AP 249.96 307.60 351.77 644.54 810.04 996.99 1207.91 1421.76 1626.96Days Payable oustanding = 365 / A.P. Turnover 1.46 1.19 1.04 0.57 0.45 0.37 0.30 0.26 0.22Financial Leverage Ratiosdebt-to-equity = D/E 3.59 4.07 4.31 3.23 2.94 2.18 1.38 1.04 0.80 0.65debt-to-assets = D/A 0.78 0.80 0.81 0.78 0.75 0.69 0.58 0.51 0.44 0.40leverage ratio = A/E 4.59 5.07 5.31 4.16 3.94 3.18 2.38 2.04 1.80 1.65Profitability RatiosNet profit margin = NI / Revenue 1.81% 2.11% 4.78% 3.57% 5.29% 10.90% 17.23% 23.02% 28.14% 29.88%Gross profit margin = (Revenue - COGS) / Revenue 17.79% 19.86% 23.74% 20.05% 22.00% 28.00% 34.00% 40.00% 46.00% 46.00%Operating profit margin = EBIT/SALES 4.51% 4.30% 7.17% 5.80% 8.00% 15.01% 22.45% 29.24% 35.17% 36.65%ROA = NI/A 18.56% 17.93% 20.21% 20.60% 20.02% 20.25% 18.97% 16.58% 14.47%Operating ROA = EBIT/ATA 0.80% 1.29% 1.17% 1.65% 3.01% 4.55% 5.55% 5.83% 5.30%ROE = NI/E 1.90% 4.46% 3.34% 4.39% 7.59% 9.38% 9.50% 8.86% 7.42%Interest Burden = Pretax income / operating income 46.39% 68.59% 57.87% 77.79% 83.69% 91.89% 97.18% 99.65% 101.29% 103.21%Tax Burden = NI/EBT 86.44% 71.66% 115.17% 79.00% 79.00% 79.00% 79.00% 79.00% 79.00% 79.00%Payout Policy Ratios Earnings Per Share = NI/AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 0.29 0.44 1.29 1.29 2.30 5.61 10.37 15.75 21.31

Present Value of Operating Lease Obligations (2010) Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2012) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2017)

Operating Operating Operating Operating Operating Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases #REF! Leases Fiscal Years Ending Leases Fiscal Years Ending Leases2011 17.877 2012 21.773 2013 24.016 2014 25.101 2015 35.501 2016 42.545 2017 64.502 2018 101.9872012 16.158 2013 18.31 2014 16.651 2015 26.637 2016 37.078 2017 54.811 2018 76.31 2019 97.562013 13.208 2014 14.195 2015 17.393 2016 26.073 2017 27.697 2018 58.015 2019 68.456 2020 96.2552014 10.169 2015 11.008 2016 17.718 2017 21.846 2018 19.804 2019 53.152 2020 66.603 2021 85.1882015 8.022 2016 8.582 2017 13.839 2018 15.586 2019 14.923 2020 51.844 2021 57.434 2022 77.418Thereafter 11.117 Thereafter 5.326 Thereafter 49.741 Thereafter 86.179 Thereafter 76.13 Thereafter 269.377 Thereafter 307.535 Thereafter 278.97Total Minimum Payments 76.551 Total Minimum Payments 79.194 Total Minimum Payments 139.358 Total Minimum Payments 201.422 Total Minimum Payments 211.133 Total Minimum Payments 529.744 Total Minimum Payments 640.84 Total Minimum Payments 737.378Less: Interest 10 Less: Interest 10 Less: Interest 26 Less: Interest 42 Less: Interest 39 Less: Interest 121 Less: Interest 141 Less: Interest 139PV of Minimum Payments 66 PV of Minimum Payments 70 PV of Minimum Payments 114 PV of Minimum Payments 159 PV of Minimum Payments 172 PV of Minimum Payments 409 PV of Minimum Payments 499 PV of Minimum Payments 598

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 4.88% Pre-Tax Cost of Debt 4.88% Pre-Tax Cost of Debt 4.88% Pre-Tax Cost of Debt 4.88% Pre-Tax Cost of Debt 4.88% Pre-Tax Cost of Debt 4.88% Pre-Tax Cost of Debt 4.88% Pre-Tax Cost of Debt 4.88%Number Years Implied by Year 6 Payment 1.4 Number Years Implied by Year 6 Payment 1.0 Number Years Implied by Year 6 Payment 3.6 Number Years Implied by Year 6 Payment 5.5 Number Years Implied by Year 6 Payment 5.1 Number Years Implied by Year 6 Payment 5.2 Number Years Implied by Year 6 5.4 Number Years Implied by Year 6 3.6

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 17.877 17.0 1 21.773 20.8 1 24.016 22.9 1 25.101 23.9 1 35.501 33.8 1 42.545 40.6 1 64.502 61.5 1 101.987 97.22 16.158 14.7 2 18.31 16.6 2 16.651 15.1 2 26.637 24.2 2 37.078 33.7 2 54.811 49.8 2 76.31 69.4 2 97.56 88.73 13.208 11.4 3 14.195 12.3 3 17.393 15.1 3 26.073 22.6 3 27.697 24.0 3 58.015 50.3 3 68.456 59.3 3 96.255 83.44 10.169 8.4 4 11.008 9.1 4 17.718 14.6 4 21.846 18.1 4 19.804 16.4 4 53.152 43.9 4 66.603 55.0 4 85.188 70.45 8.022 6.3 5 8.582 6.8 5 13.839 10.9 5 15.586 12.3 5 14.923 11.8 5 51.844 40.9 5 57.434 45.3 5 77.418 61.06 & beyond 8.022 8.3 6 & beyond 5.326 4.0 6 & beyond 13.839 35.2 6 & beyond 15.586 58.3 6 & beyond 14.923 52.0 6 & beyond 51.844 183.6 6 & beyond 57.434 208.8 6 & beyond 77.418 197.2PV of Minimum Payments 66.2 PV of Minimum Payments 69.6 PV of Minimum Payments 113.8 PV of Minimum Payments 159.4 PV of Minimum Payments 171.7 PV of Minimum Payments 409.1 PV of Minimum Payments 499.4 PV of Minimum Payments 598.0

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 79Average Time to Maturity (years): 4.57Expected Annual Number of Options Exercised: 17

Current Average Strike Price: 54.96$ Cost of Equity: 10.89%Current Stock Price: 390.54$

2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027EIncrease in Shares Outstanding: 17 17 17 17 17 17 17 17 17 17Average Strike Price: 54.96$ 54.96$ 54.96$ 54.96$ 54.96$ 54.96$ 54.96$ 54.96$ 54.96$ 54.96$ Increase in Common Stock Account: 954 954 954 954 954 954 954 954 954 954 (Assumes common stock and additional paid in capital are combined into one

Change in Treasury StockExpected Price of Repurchased Shares: $390.54 433.08$ 480.26$ 532.58$ 590.59$ 654.92$ 726.26$ 805.37$ 893.10$ 990.39$ Number of Shares Repurchased: - - - - - - - - - -

Shares Outstanding (beginning of the year) 434 451 469 486 503 521 538 555 573 590Plus: Shares Issued Through ESOP 17 17 17 17 17 17 17 17 17 17Less: Shares Repurchased in Treasury - - - - - - - - - - Shares Outstanding (end of the year) 451 469 486 503 521 538 555 573 590 607

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol NFLXCurrent Stock Price $332.00Risk Free Rate 3.07%Current Dividend Yield 0.00%Annualized St. Dev. of Stock Returns 38.80%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 7 3 66.59 0.28 265.98$ 787$ Range 6 5 71.33 2.05 265.07$ 1,212$ Range 5 4 95.25 2.16 243.21$ 858$ Range 4 3 151.53 3.14 201.09$ 656$ Range 3 21 32.39 4.26 303.61$ 6,374$ Range 2 22 44.83 5.18 293.98$ 6,569$ Range 1 22 61.13 5.97 282.13$ 6,107$ Total 79 54.96$ 4.57 284.56$ 22,563$

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