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Carter Josund Carter-Josund@uiowa.edu Connor Joyce Connor-Joyce@uiowa.edu Jax Lamm Jax-Lamm@uiowa.edu Dan Morgan Daniel-L-Morgan@uiowa.edu Zach Radel Zachary-Radel@uiowa.edu

Netflix, Inc. is an international streaming service company. This business provides subscribers with television shows, movies, original content, & more. It operates through three segments: Domestic Streaming, International Streaming, & Domestic DVD. The streaming segments earn revenues from monthly membership fees for streaming content services provided to subscribers. The Domestic DVD segment, although small, earns revenues from services including DVD-by-mail. The company was founded by Marc Randolph and Wilmont Reed Hastings, Jr. on August 29, 2007 and is headquartered in Los Gatos, CA. Stock Performance Highlights 52 week High $593.29 52 week Low $393.60 Beta Value 0.92 Average Daily Volume (M) 4.6 Share Highlights Market Capitalization (B) $239.2 Basic Shares Outstanding (M) 442.9 EPS (FY2020) $6.08 P/E Ratio 88.9 Dividend Yield 0.0% Company Performance Highlights ROA 7.5% ROE 29.6% Sales (B) $24.996 Financial Ratios Current Ratio 1.25 Debt to Equity Ratio 167.3%

We recommend a HOLD rating on Netflix. We project many growth opportunities and continued industry leading content. Our rating is based off the 6% premium given by our price target, typical of a hold rating. Thesis Drivers: • Increasing revenues internationally and domestically are

key drivers of our thesis. We estimate an average total revenue growth of about 14% over the next 10 years driven by a leading presence in the growing streaming space. Asia-Pacific is expected to be a large growth region with projected revenue CAGR of 27%.

• Investments in original content creation sets Netflix apart to be a driving force over the next few years. Netflix has been an industry leader in the content creation space and continues to prove its commitment to this investment in order to maintain or increase its market share.

• COVID-19 benefited the streaming industry due to “cord cutting” and people staying at home. Consumers turned to streaming services like Netflix to pass time. Additionally, the secular trend of dropping cable and satellite services in favor of streaming packages has increased due to the pandemic. The company saw over 24% revenue growth in 2020.

Thesis Risks: • Increased competition is the largest threat to the streaming

industry, and specifically Netflix. Established companies will continue to innovate to lower consumer costs and increase user experience along with Netflix.

• Additional regulatory risks will be experienced by Netflix as it continues to grow internationally. Netflix cites that it may incur additional costs or demand business model changes as it continues its foreign ventures.

Source: TradingView 1

Analysts

Investment Thesis Investment Thesis

Two Year Stock Performance

Current Price $552.78 Target Price $575 - $595 DCF / EP Target Price $586.02

Company Overview

Netflix Inc. (NASDAQ: NFLX) Communications

Recommendation: HOLD April 12, 2021

Krause Fund Research Fall 2021

Netflix S&P 500

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Company Description Netflix is a leading entertainment streaming services company with over 203 million paid subscribers in over 190 countries2. Customers enjoy television series, movies, documentaries, & more in many different languages and genres over the internet on a subscription basis. Some of this content is created by Netflix itself, while some is obtained by entering contracts for the ability to stream content created by outside sources. Executive Summary We believe that Netflix is primed to continue its growth. Its recognizable brand, customer loyalty, and content innovation will continue to grow revenues domestically as well as globally. While being the leader in its space, Netflix continues to commit itself to improving the users’ experience, knowing the competition within the streaming space. The stock is currently trading at high levels which reflects investors’ sentiment of that future growth. For this reason, we recommend a hold on Netflix. Our price target of $575-595 encompasses our model’s predicted growth and innovation. This price target is just above its previous trading levels, signifying that our future growth projections seem to be built into its current level.

Source: Model 3

Corporate Strategy Netflix’s core strategy is to grow its subscriber growth globally while staying within its operating margin parameters2. By continuously improving its content to sustain current subscribers and attract new ones, Netflix improves the users’ experience. Additionally, Netflix seeks to continue improvements to its user interface and extend viewing to more internet-connected screens. Netflix operates differently than many other businesses, as it can offer its fixed amount of content to an abundance of viewers while not incurring additional costs or advertising. The lack of ads during content is something that viewers appreciate and find value in when deciding on streaming platforms. Overall, Netflix is committed to improving its technology and content, which is increasingly exclusive and curated.

Source: Model 3

Service Innovation Netflix’s commitment to original content has and will continue to lead the industry. In a 2021 survey conducted by Morgan Stanley Research, 39% of respondents cited Netflix as the leader of original content creation4. Amazon Prime was the only other competitor with a double-digit share of the poll. As competition in the streaming entertainment space increases, companies will have to continue to dedicate investments in this category to catch up with Netflix. Netflix continues to increase spending in content

creation, with many new series and originals coming out in the next few years. Netflix increased its produced content assets by 18.7% YoY in 2020 to $11.6bn, signifying its investment in this space2. In the Morgan Stanley Research survey, Netflix also came in at #1 for the most widely used streaming service at 58% of respondents; Amazon Prime (45%), Disney+ (31%), and HBO Max (20%) all came in trailing behind Netflix.

Source: Morgan Stanley Research (2021) 4

SWOT Analysis Strengths Netflix is an extremely established company within streaming services. As of 2020, Netflix controlled 20% of the U.S. streaming services market. There were nearly 74 million subscribers in the United States5 and 203 million worldwide2. In addition to being the largest streaming service, Netflix tends to retain customers well. The six-month retention rate was 74%, which ranks second out of competitors6. The only service that has a higher retention rate is a bundle that includes Hulu, Disney+, and ESPN+. Since Netflix is the largest streaming service and retains customers so well, it is in a position of strength against competition. Weaknesses Netflix relies on licensed content that is not produced internally. However, companies Netflix licenses from have begun to make their own streaming services to compete with Netflix. One example of this is Disney, which announced they would begin pulling their content from Netflix in 2017 in favor of their own service. Netflix is forced to shift to content creation to deal with less availability of content they can license. In 2019, 60% of their content assets were licensed content and 40% was produced internally. In 2020 this shifted to 54% licensed content and 46% produced content2. Netflix will need to produce quality content to stay competitive. Opportunities Netflix currently operates in 190 countries, but still has tremendous opportunities to expand. Asia offers the strongest growth prospects for Netflix, as the company saw over 57% growth in subscribers for the Asia-Pacific region in 2020. As the

Year 2016 2017 2018 2019 2020 2021E 2022E 2023E

EPS 0.43$ 1.25$ 2.68$ 4.13$ 6.08$ 10.98$ 17.01$ 22.14$

2015 2016 2017 2018 2019 2020 2021E 2022E 2023ESubscribers 74,762 93,796 117,582 139,259 167,144 203,663 242,411 284,737 335,874 Operating Margin 5% 4% 7% 10% 13% 18% 19% 25% 28%

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population of this region grows rapidly and more people begin accessing the internet, Netflix will have the opportunity to expand its number of subscribers in this region. As seen in the map below, Netflix is not allowed to operate in China. If the Chinese government changed their mind and allowed Netflix to operate within its borders, it would be a tremendous growth opportunity; however, it seems unlikely that this will happen any time soon. Africa is another region Netflix will have an opportunity to expand into. In 2020 there were only 1.4 million Netflix subscribers in Africa compared to 1.2 billion people living there7. Africa contains six of the ten fastest growing economies8, and Sub-Saharan Africa is the world’s fastest growing TV market9. As the continent begins consuming more entertainment content while growing rapidly, Netflix has a large opportunity to begin expanding into the region.

Source: Netflix Help Center 10

The trend of cord cutting is also an opportunity for Netflix. Consumers are shifting from cable and satellite television to lower cost streaming services. COVID-19 is accelerating this shift due to more time spent at home. As people continue to shift from traditional television to online streaming services, Netflix will have an opportunity to attract these customers. Threats A threat to Netflix is the increasing number of other streaming service providers and the ability for companies to easily create their own streaming service. As the streaming services industry expands, companies are beginning to make their own streaming platforms instead of licensing their content to Netflix. This competition reinforces the importance for Netflix to retain subscribers and prevent them leaving in favor of a different streaming service. In addition, Disney will own 100% of Hulu in 2024, so their services will continue to be strong competitors to Netflix in the future11. Other companies like CBS and Discovery have their own streaming services now as well, so it will be important for Netflix to continue to create quality content to retain subscribers. Netflix is also at risk of regulatory and political uncertainty as they continue to have more of a presence worldwide. Governments across the globe can create new laws and regulations that may restrict Netflix’s ability to operate in that jurisdiction2. Although Netflix does not believe they will be shut out of countries they are currently operating in, they may incur additional legal costs to service those countries. Netflix also states that political and economic unrest within specific regions may affect its ability to deliver services as well2.

Industry Description Netflix falls under the communications sector. More specifically, Netflix operates in the media and entertainment industry. This industry is broad and includes movies and entertainment, broadcasting, cable and satellite, advertising, and publishing. Examples of companies within this industry include Netflix, Walt Disney, Hulu, Apple, Alphabet, Amazon, Comcast, AT&T, Viacom CBS, Discovery, and Spotify. These companies generate revenue through streaming or broadcasting media content to customers. Industry Trends There are many trends among the Media and Entertainment Industry which has led it to be a constantly changing environment within the past few years. The main trends consist of Covid-19, cord-cutting, shifts from leasing to content creation, and advancements in 5G internet capabilities. With everyone stuck at home without contact to the outside world, people began to look for alternative entertainment. Many people without streaming platforms, such as Netflix, turned to the streaming industry for their entertainment needs. This led to increased revenues across the board for the entire industry. It also leads to retained customers who may have gotten hooked by the company’s services. In the same sense, ‘cord-cutting’ has become a household concept as well. Many families are making the switch from cable television to streaming and, whether literally or metaphorically, are “cutting the cord”. Traditional cable TV is becoming obsolete in comparison to its streaming competition that can now broadcast live television as well as pre-existing content. In 2020 the share of cord-cutting households in the United States jumped to 24.1% from 19.1% in 2019. By 2024 this number is expected to reach 35.4%12. Another trend affecting the industry is the shift from leasing to content creation. Companies are no longer looking to lease content to other companies and are instead creating their own streaming platforms. This is especially important to companies like Netflix who rely on leased content to retain subscribers. The graph below highlights the number of original titles within each service as of April 2020:

Source: AllConnect 13

Service # of Original TitlesNetflix 1,177 HBO Max 521Showtime 284Amazon Prime Video 222Hulu 73Starz 40Disney+ 36Apple TV+ 32CBS All Access 14

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The last of the trends serves as an amplifier to the others. Advancements in 5G speeds are enabling the streaming world to operate at higher efficiencies and will lead to further cord cutting and content creation. Advancements in internet capabilities also leads to advancements in internet access as well. Areas in developing parts of the world that did not have access before will now have internet access and the potential to be a customer for Netflix and its peers in the future. As you can see in the graphic below, the areas of high population and low penetration tend to be in the Asian and African continents. As a result of 5G technology, these countries will begin to see lower costs in broadband internet, which means more people streaming and a larger market for the industry. This will prove very advantageous for streaming services in the coming years.

Source: Oxford Internet Institute 14

Competitors In order to understand Netflix’s position amongst its competitors, we must first understand what kinds of products or services are substitutable for Netflix’s subscription package. Other monthly subscription entertainment including movie and series streaming, live television streaming, and music streaming are all viable substitutes to Netflix and its monthly subscription package. Walt Disney is a multinational mass media and entertainment conglomerate. They own several familiar names within the entertainment industry including Pixar, Marvel, Lucasfilm, 20th Century Studios, ESPN, ABC, Freeform, FX, and National Geographic. Most notably they also own direct-to-customer streaming platforms like Disney+ and ESPN+ as well as a majority stake in Hulu. They also offer a very appealing bundling package for all three streaming services at $13.99 a month15. Hulu is a subscription video on demand service fully controlled and majority owned by The Walt Disney Company, with Comcast and NBC Universal as minority equity stakeholders. Hulu prides itself on its Hulu live TV streaming and serves as one of the greatest threats to cable providers and continues to amplify the cord cutting trend. As of the third quarter of 2020, Hulu had 36.6 million subscribers16. Throughout 2019, Disney made major moves in acquiring 21st Century Fox, giving it a 60% majority stake in Hulu. Comcast, the only other shareholder announced that it may cede its control to Disney as early as 2024, giving Disney an even larger stake in the company and furthering their competitive edge within the industry11.

Apple is a technology company that designs, develops, and sells consumer electronics, computer software, and online services. Most widely known for the iPhone and Mac computers, Apple operates in several different spheres including media and entertainment. Its Apple TV+ segment is another up-and-coming player within the industry. Apple TV+ is Apple’s ad-free subscription video on demand streaming service. They’ve already started creating their own ‘All Apple Originals’ such as For All

Mankind, Grey Hound, The Banker, and The Morning Show17. Apple TV+ will prove to be a formidable competitor in the coming years as it continues to grow in popularity and generate new and exciting content with the plethora of cash Apple has to spend. Alphabet (Google) is a tech company that specializes in internet-related services and products. Best known for its search engine, Google operates much like Apple and Microsoft and produces many different products and services such as Google Pixel phones, Android Software, Chrome Books, Google Workplace Collaboration Tools, and owns several different subsidiaries, the most popular of which is YouTube. The important part of YouTube is its new YouTube Premium which is Google’s attempt to enter this market as well. This is a very advantageous and strategic play on Google’s part, as it will provide them another platform for ad revenue. Amazon is another technology company that focuses on ecommerce, cloud computing, digital streaming, and artificial intelligence. Aside from its main ecommerce business, Amazon owns Amazon Web Services, Ring, Zappos, Whole Foods, Amazon Publishing, Amazon Studios, and multiple subscription-based services such as Amazon Music, Twitch, Audible, and Prime Video. Prime video is the most comparable segment to Netflix and is much like Disney+. Amazon also contributes its own content to the platform through Amazon Studios. Comcast is a telecommunications conglomerate and the second largest broadcasting and cable television company in the world by revenue (behind AT&T). Its subsidiaries include MSNBC, CNBC, USA Network, Syfy, NBCSN, DreamWorks Animation, Universal Studios, and most notably the new streaming service Peacock. In the same way that Disney provides a platform for their content through Disney+, Comcast uses Peacock for a direct-to-consumer streaming platform instead of leasing their content to other platforms. For example, Comcast shows such as The Office and Parks and Recreation were taken off Netflix and added to Peacock in January of 202118. This further illustrates the previously mentioned death of leasing trend. AT&T, much like the previously mentioned companies, is a multinational conglomerate holding company. They own several different entities including Warner Media, DirecTV, CNN, HBO, HBO Max and their all-new AT&T TV. Much like Hulu live, AT&T TV serves as an alternative to cable and is a growing player in the live TV streaming realm. This sort of investment is a great example of product cannibalization, but makes logical sense moving into the future as more people cut the cord and switch to live-streaming their television. HBO Max is AT&T’s movie streaming platform, and it follows a business model much like Netflix’s. AT&T also announced that it would spin off DirecTV,

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U-Verse, and AT&T TV into a separate entity and sell a 30% stake to TPG Capital in the second quarter of 202119. Viacom CBS is a diversified multinational mass media conglomerate formed through the merger of CBS corporation and Viacom in 2019. The company is parent of Showtime, Viacom, CBS, Pluto TV, Paramount Pictures, and most importantly it’s all new Paramount+. Paramount plus is no different in use than Disney+ or Peacock. Viacom CBS uses Paramount+ to platform its own content and adds yet again another substitute to Netflix. Discovery is a mass media factual television company. They own many different subsidiaries including Discovery Channel, Animal Planet, Science Channel, TLC, Eurosport, Golf TV, Food Network, HGTV, and Travel Channel. Recently, they have released their own streaming platform in Discovery+ which will feature television series, movies, and original programming from the channels that the company owns. This additional streaming platform continues to emphasize the low barriers to entry within this space. Spotify is an audio streaming and media services provider and is one of the world’s largest music streaming service providers. The company serves as a streaming platform for recorded music and podcasts, including 70 million songs from record labels and media companies and has over 345 million monthly active users, 155 million of which are paying subscribers20. Although Spotify is not necessarily a TV streaming service, it does serve as a substitute to Netflix due to its subscription-based business model and the opportunity cost associated with the types of entertainment services someone chooses to subscribe to and the size of budget they assign to it. Overall, we believe that Netflix will continue to dominate the so-called “streaming wars” due to its ability to adapt to a changing environment. Their strong subscription base is the largest in the world at 203 million subscribers, and as you can see by the graph, we do not see that changing any time soon. Not many people will just drop their Netflix subscription; therefore, Netflix is here to stay. We also project that Netflix will fare better in foreign markets than their competition as they continue to create foreign content and capitalize on untapped markets in the Latin American, African, and Asian-Pacific regions.

Source: Cartoon Brew 21

Source: FactSet 22

Source: FactSet 22

Porter’s 5 Forces Existing Competition: High and Increasing The largest telecommunications and entertainment companies are all competing for subscribers within this so called “streaming war”. In fact, the competition is so fierce that it has been given a nickname. Walt Disney, Hulu, Apple, Alphabet, Amazon, Comcast, AT&T, Viacom CBS, Discovery, and Spotify all have an immense amount of capital (some more than others), to drive their growth initiatives into the future. A majority, if not all, of these companies are heavily investing in their own content creation. Each of the companies mentioned have a unique niche within this market but must be weary of the competition and fend off the others from encroaching on their slice of the pie. Treat of Entry: High Netflix used to be a unique company that had few competitors. Its business model was the first of its kind until recent years when companies started realizing that they could platform their own content. This ability gives the industry a relatively low barrier to entry. Low barriers to entry have served as a catalyst for the content creation trend we are seeing within the industry. For example, ‘Netflix Originals’, the company’s name for all of its new original television show series, is Netflix’s aim at retaining subscribers with their own content. Any company that can create content, can effectively stream that content just as easily; however, Netflix has the largest subscription base and a

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substantially large lead over its peers. Being the number one player with 203 million subscribers gives Netflix an edge that other companies do not have. Another problem facing competition is the lack of content. Netflix streams a variety of content from a diverse set of producers. Newcomers are faced with broadcasting only their own content, which for many might not be enough to sustain a strong subscriber base. Threat of Substitutes: High In 2021, consumers have an abundance of options to choose from when deciding on their streaming services. Not only do they have many options, but they can also change these options rapidly, renewing or cancelling a subscription each month. As content continues to be created, consumers may choose another streaming service based on just a few shows or movies. The low monthly costs of each service allow consumers to try many out to determine which they like best. Other entertainment options can also be considered substitutes. As countries continue to open up post-pandemic, consumers are likely to prefer entertainment that is outside of their home. Activities outdoors, travel, sports games, concerts, and more are all possible substitutes for streaming service subscriptions.

Source: The Street 23

Power of Suppliers: Moderate The suppliers of this industry include production firms, for licensing, and creative talent (actors, writers, producers, etc.). The power of suppliers depends on the popularity and demand of given talent. With the success of original content containing new actors on streaming services, the bargaining power of suppliers is moderate. There is currently an abundance of talent in the industry; however, the best actors and producers will always demand lucrative contracts and have immense bargaining power. For example, Adam Sandler signed a $250 million, four-movie deal with Netflix in 202024. These investments in big names do usually pay off, as many of Sandler’s movies on Netflix top its charts. Murder Mystery starring Adam Sandler and Jennifer Anniston, for example, was the most watched film on Netflix in 201924. Power of Buyers: High There is immense bargaining power for consumers in the media and entertainment industry. With the abundance of options within the industry and outside of it for entertainment, customers can have a large influence. Consumers can choose from a wide variety

of different content and platforms, increasing the need for companies in the space to listen to their customers and following the trends. Industry catalysts for growth Regional expansion will be crucial for streaming services to gain subscribers. By creating and licensing content for other languages & cultures and providing access to their platforms, streaming services can capitalize on the growth opportunities around the world. Content creation will continue to drive growth for companies within this industry. As networks create their own streaming platforms, streaming services must continue to heavily invest in unique content. Consumers will look at new series and movies when deciding which services to subscribe to. 5G infrastructure is enabling better connection throughout the U.S. and the globe. As technology continues to advance with 5G, more consumers will be exposed and willing to invest in online video streaming. Brand recognition is increasing in importance as the field of competition broadens. As new services and networks are creating platforms for streaming, companies must focus on marketing themselves and building brand recognition. Almost all consumers know Netflix, Disney, Amazon, and the other big names, so it is up to them to maintain their status as the top players, while newcomers in the field look to build themselves.

Internet Users Per 100 People (International) With the continual rise of the internet, opportunities have opened for businesses to collect market share. This metric measures how many people have access to internet across the world. As more consumers have access to the internet, technology and media companies have access to more customers. The International Telecommunication Union (ITU) conducts an annual international survey to determine the amount of internet users per 100 people. Currently, about 51 out of 100 people have access to internet. High income countries have grown at around 2% per year since 2011 and reached 72 out of 100 during the last data gathering in 201825. We expect this level to stagnate due to the ongoing pandemic but continue to recover at 1-2% annually as it reaches the peak of 100. Low- and middle-income countries have grown at 3% since 2011 to levels of 23 out of 100 in 201725. We also expect this metric to slow down due to the pandemic but quickly rise to at least 3% per year as heavy investments continue to be made for infrastructure in developing countries. Diving into specific countries, we can assess the potential for growth as well. In the Asia-Pacific, the internet penetration rate for China, Japan, and South Korea, was 65%, 86%, and 92% respectively26. Additionally, the African region houses many of the fastest growing online populations as of January 2020. The Republic of Congo and the Democratic Republic of Congo both have growth rates over 100%27. Burundi, Central African

Service Subscription CostNetflix 13.99$ Amazon Prime Video 8.99 Hulu 11.99 Disney+ 7.99 ESPN+ 5.99 HBO Max 14.99 Apple TV+ 4.99 Paramount+ 9.99 Showtime 10.99 YouTube Premium 11.99 Peacock 9.99 Discovery+ 6.99

Macroeconomic Outlook

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Republic, and Kenya are just a few of the African countries with growth rates greater than 15%27. We believe these regions will continue to grow at these high rates, exposing internet companies to additional revenues in the coming years.

Source: International Telecommunication Union 27

Current Employment Statistics (CES) The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. Employment and aggregate hours are indicative of the current state of the economy and tend to move in sync with U.S. business cycles, reaching peaks and troughs at about the same time as the cycle28. The unemployment rate indicates consumers’ willingness to spend on discretionary services like entertainment, and because Netflix (NFLX) is a media and entertainment company, employment numbers as an indicator of the overall health of the economy can indicate the performance of the company as well. If there is less money entering the pockets of customers, there is less money to spend on non-staple services like a Netflix subscription. At the peak of Covid turbulence, the unemployment rate grew to 14.8%. Since then, it has dropped to near 6%. With increasing vaccination numbers, the Bureau of Labor Statistics predicts that number will steadily continue to fall.

Source: Bureau of Labor Statistics 28

U.S Real Gross Domestic Product Real GDP is an inflation adjusted measurement that reflects the market value of all goods and services produced within a given year. The measurement is often used as an indicator of the overall health of the economy and is a driver for the communications sector. Steady gains are a positive indicator of the overall strength of the economy. The largest component of real GDP is consumer spending, which contributes to almost 70% of the economy. If consumer spending decreases, then overall real GDP will decrease. When consumer spending increases, more money will

be spent on streaming services like Netflix. Real GDP decreased 3.5 percent in 202029. After one of the largest historical decreases of 31.4% in the second quarter, real GDP rebounded in quarter three and four increasing 31.4% and 4.0% respectively30. The overall decrease in real GDP in 2020 reflected decreases in areas like exports, PCE, and nonresidential fixed investments. However, the slow rise of GDP can be attributed to the reopening of businesses and services that have been restricted due to the pandemic. Netflix has not been negatively affected by COVID-19 restrictions as the pandemic has led to more time spent at home streaming entertainment content. We forecast real GDP will increase about 5%-6% over the next twelve months driven by the recovery of the labor market, the vaccine rollout, the falling unemployment rate, and the recent COVID-19 stimulus plan. Consumer Confidence Consumer Sentiment is a measurement of how consumers feel about their own financial well-being both now and in the future, as well as the state of the economy. High consumer sentiment indicates higher consumer spending. Since consumer spending represents over two-thirds of U.S. GDP, consumer sentiment is a good indicator of where the economy is headed. The latest release as of February 2021 reports consumer sentiment at 76.8, down from 101 in February 2020 but up from 71.8 in April 2020, which was the worst reading since December 201131. This indicates that consumers are less likely to spend as much as they did before the pandemic. This would presumably affect streaming service spending negatively. However, we believe that due to vaccine rollouts people will return to jobs and feel more confident in their financial situation. In addition, we believe that recent stimulus checks will increase consumer sentiment. We believe that by the end of 2021 consumer sentiment will be above 85, by the end of 2022 it will be above 95.

Source: University of Michigan via FRED 31

Inflation The Consumer Price Index (CPI) is a measurement that examines the average price for a basket of consumer goods and services over a period. These consumer goods and services consist of food, fuels, medical care, utilities, and more. The CPI is a frequently used statistic to recognize periods of inflation or deflation in the U.S economy. On April 13th, 2021, the Bureau of Labor Statistics released the CPI results for March of 2021. The CPI for all urban consumers increased 0.6% in March after increasing 0.4% in February. The 0.6% increase for the month of March was the greatest one month increase since the 0.6 percent increase in August of 2012. Over the last 12 months, the index increased 2.6 percent before seasonal adjustment. It is also important to note that gasoline prices accounted for half of the seasonally adjusted

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Internet Users in Population (%)

High income countriesLow & middle income countries

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increase in the ‘all items’ index, rising 9.1% in March32. The CPI for March has shown that demand for goods and services are increasing coming out of the COVID-19 pandemic. Consumers are eager to get out and spend, as shown from the data. Inflation is expected to temporarily rise in the coming months as the Federal Reserve has pumped trillions of dollars into the U.S economy as well as piped up demand from consumers. Fed Chairman Jerome Powell stated they will not adjust their policy based on short-term jumps in inflation and does not expect any interest rate hikes this year.

Source: Bureau of Labor Statistics 32

Valuation Methodology We arrived at our price target for Netflix after careful examination of past financial statements and industry analysis. After gaining knowledge about the company, we projected financial statements through the year 2030 and conducted a discounted cash flow analysis. We also produced a relative valuation using competitors in the at-home entertainment industry but did not weigh this method as much when determining our price target due to limited comparable companies. Our specific assumptions and methods are highlighted below. Discounted Cash Flow (DCF) Our discounted cash flow analysis provided a price target of $586.02, 6% above its current price. We believe that this method provides the most accurate valuation as Netflix is a unique company with growth potential that we were able to build into the model. The DCF model utilized calculated free cash flows from our forecasted financial statements. We then discounted 10 years of predicted cash flows by our calculated WACC. We used a continuing value growth rate of 3% to reflect steady state growth after 10 years to calculate a terminal value. Our terminal value accounted for 84% of the value of operating assets which we felt was accurate for our 10-year forecast. Revenue Decomposition Netflix’s streaming segment accounts for 99% of its revenues, and surprisingly the company still makes minor revenues from its original DVD business2. In assessing the revenue decomposition, we felt we should not focus on the product segments, being that 99% of which would be streaming; therefore, equating our estimations to pure guess work. We instead chose to base our projections on geographic presence and future growth in foreign markets. With that in mind, we decided to emphasize subscriber growth followed by growth in revenue per subscriber because these are better indicators of future revenue growth. Some of the prices per subscriber were falling in certain regions because the

company is looking to establish a large share of the market before competitors can; therefore, we put more emphasis on the subscriber growth rather than growth in revenue per subscriber. We then used the percentage of people who owned a subscription over the population of the geographies we chose as an intuition check to see if our estimations were reasonable. Our chosen geographies include: United States & Canada (UCAN); Europe, Middle East, & Africa (EMEA); Latin America (LATAM); and Asia-Pacific (APAC).

Source: Model 3

Source: Model 3

Source: Model 3

United States & Canada (UCAN) The United States and Canada are the most exposed markets to Netflix. For that reason, we do not believe that this geography will be a big driver for growth in future years. The highest year-over-year growth for this region is 5% followed by a lower growth over our 10-year projection period to 3% in the final fiscal year 2030. Europe, Middle East, & Africa (EMEA) The European Market has not progressed to streaming platforms quite like the UCAN region, and the African and Middle Eastern markets have higher room for growth considering the technological advancement in the areas and higher access to internet. To account for the growth within these regions we project next year’s year-over-year growth to be approximately 25% and as the market matures over the next ten years, we project a 5% growth in the final year.

Valuation Analysis

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Latin America (LATAM) Much like the EMEA markets, we expect moderately high growth for the next 5 years, followed by lower, more-mature growth into the final 5 years. The first year-over-year subscriber growth is estimated to be 15% while the final year is in line with the UCAN region at 3%. Asia-Pacific (APAC) The Asia-Pacific region has a lot of growth potential. With 4.3 billion people within the region (more than half of the world’s population), we expect Netflix to rapidly grow in popularity in the near future33. Especially with content catered specifically to the regions, mainly China, Japan, and India. Netflix has already made great strides in India as the company has set aside $420 million to develop India-specific content34. Most recently, Netflix reported that revenue from South Korea increased 123.5% in 2020, while also increasing operating profit by 295% in the region. This revenue increase clearly supports our guidance for growth in this region. Expenses The biggest expense for Netflix is the Amortization of leased content (10K). With Netflix’s business model revolving around leasing content from other companies to stream on their own platform, they bear a hefty price when that content amortizes; however, with the industry changes mentioned previously, Netflix will begin to rely less and less on leased content and will not be forced to amortize as many leases. Our forecast uses a constant amortization rate of 52.85% a year. In the past Netflix amortized content at a much higher rate but decreased recently due to the increase in original content. Original content does not need to be amortized as quickly as licensed content. However, they will still have to amortize (or at least impair) the new content because movies and TV shows have more value when they are new, and as time goes on, the content losses value. The content they create today will not be as valuable tomorrow. For these reasons, we decided to use a rate based off 2019 and 2020. For the Cost of Revenue projection, we decided to use the straight-line method at 16.5% of sales. We averaged the Cost of Revenues as a percentage of sales from the past two years to use as our value. We felt the last two years would be the most indicative of values moving forward as they have begun to increase spending in produced content. For the Marketing Expense projection, we also used the straight-line method at 9% of sales. We decided to use the 2020 value as that would be the most reflective of Netflix’s strategy moving forward. For the Technology & Development Expense projection, we used the straight-line method at 7.5% of sales. For the years 2018 through 2020, this expense was between 7% and 8% of sales, so we decided to project forward using 7.5% as we believe they will sustain similar patterns of technology and development costs moving forward. For the General & Administrative Expense, we also used the straight-line method at 4.4% of sales. We averaged the 2019 and

2020 values as percentage of sales and used that figure moving forward. Capital Expenditures Netflix is a company that does not require a whole lot of capital expenditures. They do not have factories or warehouses. The main capital expenses Netflix endures are upkeep on servers and administrative buildings such as the headquarters in Los Gatos, California. We do not suspect a significant change in capital expenditure growth. Our forecast expects a consistent 15% growth year-over-year to keep pace with server demand as the company continues to create more content and add to the platform. WACC We computed the weighted average cost of capital (WACC) for Netflix to be 5.69%. This was calculated by using the weight and cost of equity of 92.96% and 5.95%, respectively; and the weight and cost of debt of 7.04% and 2.24%, respectively. Cost of Equity: We determined Netflix’s cost of equity by using the capital assets pricing model (or CAPM). We used a five-year raw beta of 0.92 sourced from Bloomberg. Additionally, we used Damodaran’s implied equity risk premium of 4.63%. Lastly, we used the 10-year treasury bond rate of 1.68% as the risk-free rate. Using the CAPM, this computes the cost of equity of 5.95%. Cost of Debt: To compute the cost of debt, we used the yield-to-maturity of a Netflix corporate bond maturing in 2030 of 2.87%. The marginal tax rate of 23% was calculated using the 2020 marginal tax rate. This produces an after-tax cost of debt of 2.21% Relative Comparable Companies The last method we used to value Netflix is through a relative analysis of the peer companies within the industry that we found comparable to Netflix. This was a tough task because there are not many companies like Netflix. Companies have segments or subsidiaries similar to Netflix, but no company is outright relative. For this reason and because it deals much less with company fundamentals, we place less emphasis on this valuation. Despite this trouble, we were still able to value the company relative to the parent companies that controlled the previously mentioned similar segments and subsidiaries and get a good check that our DCF model was not outlandish. The implied relative value using EV/EBITDA, the average of which was 17.78x, gives us an implied share price of $578.14. This is very similar to the implied share price derived from our DCF analysis of $586.02; therefore, ensuring us that our assumptions were at the very least reasonable. Dividend Discount Model Netflix has never previously declared dividends to its shareholders. Based on management discussion and corporate strategy, we do not believe Netflix will be paying out dividends anytime in the future; because of this, we did not include the dividend discount model in our assessment of Netflix’s valuation.

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Marketing Cost (% of sales) vs. COGS (% of sales)

Source: Model 3

We chose to compare the expenses of marketing and cost of goods sold together. With this analysis, we can identify the price range associated with Netflix being able to cut costs or possibly increasing costs. As stated previously, we used the straight-line method thus not increasing or decreasing these costs as a percentage of sales so this table allowed us to understand what kind of changes in the price target would be reflected due to changes in two of Netflix’s expenses. CV NOPLAT Growth vs. WACC

Source: Model 3

The continuing value of NOPLAT growth has a large effect on our model. Since the terminal value makes up a large portion of our valuation, the rate NOPLAT grows into perpetuity affects the valuation immensely. If our continuing value NOPLAT growth increased by just 0.2%, our implied share price would increase by 5.7%. A change in the WACC would also have a large effect on our model. An increase of 0.2% would decrease the valuation by 7.65%. Equity Risk Premium vs. Beta

Source: Model 3

We utilized this sensitivity table to test two of the factors that produce Netflix’s cost of equity, thus affecting the WACC. The equity risk premium we used was cited from Aswath Damodaran and is generally accepted an accurate estimation. We know that it is still just implied and so we tested a range of values. As expected, when the equity risk premium decreases our valuation moves up slightly, and vice versa. The beta we used for Netflix

was a five-year raw beta. We felt this most accurately reflected the state of Netflix moving forward, but to understand how the price target may change due to changing the beta value, we compared it in this table with the equity risk premium. As shown above, increasing or decreasing the beta slightly can have a large impact on the price target, with a decrease and increase of beta of just 0.15 producing prices of $837.20 and $488.69, respectively. Risk Free Rate vs. Marginal Tax Rate

Source: Model 3

We tested a few more variables that are used to calculate WACC in the risk-free rate and the marginal tax rate for Netflix. The risk-free rate used was the 10-year treasury bond rate at our given valuation date. We analyzed this variable as we understand that bond rates can change week to week and wanted to be able to see how different bond yields would change our outcome. We also assessed marginal tax rate changes. We used historical tax rates in order to calculate our marginal tax rate as we felt that was most accurate. We are aware that tax rates are at the mercy of the American and international governments and are likely to continue to change moving forward. There is only a slight variation in our price target due to changing tax rates. Cost of Debt vs. Cost of Equity

Source: Model 3

This sensitivity table, much like the ERP vs Beta where we explore the inputs of the cost of equity, examines the inputs of our weighted average cost of capital. We calculated the cost of equity using the capitalized asset pricing model (or CAPM). For the risk-free rate, we used the 10-year treasury rate. The beta we used was the 5-year raw beta as per Bloomberg. Finally, the equity risk premium as mentioned prior, is Damodaran’s implied trailing twelve-month calculation. As for cost of debt, we used the yield on our company’s outstanding bonds with a maturity closest to 10 years. And like any calculation using assumptions, we understand that these values are implied and therefore must be sensitivity tested. Because Netflix’s capital structure is over 92% equity, the range of values we found in this analysis is not very large. The implied share prices lie between $579.97 and $588.83.

586.02 15.00% 15.50% 16.00% 16.50% 17.00% 17.50% 18.00%6.00% 783.97 761.98 739.98 717.99 695.99 674.00 652.00 7.00% 739.98 717.99 695.99 674.00 652.00 630.01 608.01 8.00% 695.99 674.00 652.00 630.01 608.01 586.02 564.02 9.00% 652.00 630.01 608.01 586.02 564.02 542.03 520.03

10.00% 608.01 586.02 564.02 542.03 520.03 498.04 476.04 11.00% 564.02 542.03 520.03 498.04 476.04 454.05 432.05 12.00% 520.03 498.04 476.04 454.05 432.05 410.06 388.07

Mar

ketin

g %

COGS%

586.02 5.39% 5.49% 5.59% 5.69% 5.79% 5.89% 5.99%3.30% 735.58 699.74 667.04 637.90 609.54 584.14 560.64 3.20% 710.08 676.85 646.42 619.22 592.64 568.77 546.61 3.10% 686.80 655.89 627.47 601.97 577.00 554.50 533.56 3.00% 665.47 636.60 609.98 586.02 562.48 541.21 521.38 2.90% 645.85 618.81 593.78 571.21 548.97 528.82 509.99 2.80% 627.75 602.34 578.75 557.42 536.35 517.23 499.31 2.70% 610.99 587.04 564.76 544.56 524.56 506.36 489.28

WACC

CV N

OPL

AT G

row

th

586.02 0.77 0.82 0.87 0.92 0.97 1.02 1.07 4.48% 837.20 750.64 679.52 617.89 569.62 526.30 488.69 4.53% 821.01 736.60 667.16 606.91 559.69 517.27 480.43 4.58% 805.41 723.05 655.21 596.29 550.08 508.53 472.42 4.63% 790.35 709.95 643.66 586.02 540.76 500.06 464.66 4.68% 775.81 697.30 632.48 576.06 531.74 491.84 457.12 4.73% 761.78 685.06 621.65 566.42 522.99 483.87 449.81 4.78% 748.21 673.22 611.17 557.07 514.50 476.13 442.70

Beta

Equi

ty R

isk P

rem

ium

586.02 21.56% 22.16% 22.56% 23.16% 23.56% 24.16% 24.56%1.38% 677.42 670.90 666.54 660.04 655.65 649.10 644.73 1.48% 650.46 644.16 639.96 633.68 629.44 623.12 618.90 1.58% 625.44 619.35 615.29 609.22 605.12 599.01 594.93 1.68% 601.71 595.82 591.89 586.02 582.05 576.15 572.20 1.78% 580.45 574.73 570.92 565.23 561.39 555.66 551.84 1.88% 560.14 554.60 550.91 545.38 541.66 536.10 532.40 1.98% 541.11 535.74 532.15 526.79 523.17 517.78 514.18

Marginal Tax

Risk

Fre

e Ra

te

586.02 5.20% 5.45% 5.70% 5.95% 6.20% 6.45% 6.70%2.27% 590.50 590.89 591.28 591.68 592.06 592.45 592.84 2.47% 588.62 589.01 589.40 589.79 590.17 590.56 590.95 2.67% 586.74 587.13 587.52 587.91 588.29 588.68 589.07 2.87% 584.85 585.24 585.63 586.02 586.40 586.79 587.17 3.07% 583.01 583.40 583.79 584.17 584.56 584.94 585.32 3.27% 581.16 581.55 581.93 582.32 582.70 583.08 583.47 3.47% 579.32 579.70 580.09 580.47 580.85 581.24 581.62

Cost of Equity

Pre-

Tax C

ost o

f Deb

t

Sensitivity Analysis

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CV NOPLAT Growth vs. CV Year ROIC

Source: Model 3

The terminal value made up about 84% of our valuation. Since this number is high, we wanted to assess what kind of changes would occur to the price target as we changed the inputs to our terminal value calculation. As seen in the table above, the CV NOPLAT growth rate clearly has a large affect on the price. We are confident that 3% reflects the most accurate assumption but are aware that 30 basis point change can move the price $40-50 in either direction. The CV year ROIC does not affect the target price as much but has a minor influence.

Important Disclaimer This report was created by students enrolled in the Applied Equity Valuation (FIN:4250) 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.

586.02 15.62% 16.12% 16.62% 17.12% 17.62% 18.12% 18.62%3.30% 625.02 629.58 633.86 637.90 641.70 645.30 648.70 3.20% 607.22 611.47 615.46 619.21 622.76 626.10 629.27 3.10% 590.81 594.76 598.48 601.97 605.27 608.39 611.34 3.00% 575.61 579.30 582.76 586.02 589.09 591.99 594.74 2.90% 561.51 564.94 568.17 571.20 574.07 576.78 579.34 2.80% 548.38 551.58 554.59 557.42 560.09 562.61 565.00 2.70% 536.13 539.11 541.92 544.55 547.04 549.39 551.62 CV

NO

PLAT

Gro

wth

CV Year ROIC

12 | P a g e

References 1. Tradingview – Netflix Graph

https://www.tradingview.com/symbols/NASDAQ-NFLX/

2. SEC 10k https://www.sec.gov/ix?doc=/Archives/edgar/data/1065280/000106528021000040/nflx-20201231.htm

3. Model – Included Below 4. Yahoo – Streaming Survey

https://www.yahoo.com/entertainment/survey-39-americans-netflix-best-134353172.html

5. The Wrap Yes, Netflix Still Rules Streaming in the US - But Challengers Are Catching Up Fast | Chart (thewrap.com)

6. Bloomberg Second Measure Disney+ takes customer retention crown from Netflix - Bloomberg Second Measure

7. Statista – African Subscribers Subscribers of Netflix and MultiChoice Group in Africa 2020 | Statista

8. Nasdaq The 5 Fastest Growing Economies In The World | Nasdaq

9. Business Insider – African Originals How Netflix's African Originals Show Commitment to the Continent (businessinsider.com)

10. Netflix Help Center https://help.netflix.com/en/node/14164

11. CNN – Disney Full Control of Hulu https://www.cnn.com/2019/05/14/media/disney-buys-comcast-hulu-ownership/index.html

12. Statista – Cord Cutting https://www.statista.com/statistics/495693/cord-cut-penetration-usa/

13. AllConnect – Original titles https://www.allconnect.com/blog/ranking-best-original-content-streaming

14. Oxford internet Institute – Internet Penetration Map https://geography.oii.ox.ac.uk/internet-population-and-penetration/

15. Business Insider – Disney https://www.businessinsider.com/disney-plus-price

16. CNBC – Hulu https://www.cnbc.com/2020/11/12/disney-plus-blows-out-expectations-in-its-first-year-with-73point7-million-subscribers.html

17. Apple – All Apple Originals https://www.apple.com/tv-pr/originals/

18. Deadline – Comcast https://deadline.com/2019/09/parks-recreation-acquired-peacock-join-the-office-nbcu-streaming-service-1202736698/

19. Deadline – AT&T https://deadline.com/2021/02/att-deal-directv-with-private-equity-firm-tpg-1234701305/

20. Spotify – Subscriber numbers https://newsroom.spotify.com/company-info/

21. Cartoon Brew – Competition https://www.cartoonbrew.com/business/analysis-u-s-streaming-subs-grew-by-over-50-in-2020-benefiting-all-major-services-200533.html

22. Factset https://my.apps.factset.com/today/

23. The Street – Streaming service prices https://www.thestreet.com/lifestyle/best-streaming-services-cost-15166523

24. The Things – Adam Sandler contract https://www.thethings.com/heres-how-adam-sandler-landed-his-250-million-deal-with-netflix/#:~:text=Adam%20Sandler%20has%20proven%20himself,%24250%20million%20four%2Dmovie%20deal.

25. World Bank – ITU (Internet Users) https://data.worldbank.org/indicator/IT.NET.USER.ZS?end=2019&start=2002&view=chart

26. Statista – Asian Internet Penetration https://www-statista-com.proxy.lib.uiowa.edu/forecasts/1143800/internet-penetration-by-country

27. Online population growth – Statista https://www-statista-com.proxy.lib.uiowa.edu/statistics/292488/fastest-growing-internet-populations/

28. Bureau of Labor Statistics – Unemployment https://data.bls.gov/timeseries/LNS14000000

29. Bureau of Economic Analysis – GDP Gross Domestic Product, 4th Quarter and Year 2020 (Advance Estimate) | U.S. Bureau of Economic Analysis (BEA)

30. The Balance – GDP Current US GDP Rate Q4 Third Estimate: 4.3% (thebalance.com)

31. FRED – Consumer Sentiment University of Michigan: Consumer Sentiment (UMCSENT) | FRED | St. Louis Fed

32. Bureau of Labor Statistics – Inflation https://www.bls.gov/news.release/pdf/cpi.pdf

33. Asia Pacific https://asiapacific.unfpa.org/en/node/15207#:~:text=The%20Asia%20and%20the%20Pacific,populous%20countries%2C%20China%20and%20India.

34. Motley Fool – Netflix In India https://www.fool.com/investing/2020/07/30/netflix-is-making-the-right-moves-in-india-at-the.aspx

NetflixRevenue Decomposition

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

Streaming Revenues 15428752 19859230 24756675 31,829,979 37,656,724 44,429,387 51,977,637 60,209,735 67,413,967 75,098,182 80,845,377 87,231,184 92,841,518 37% 29% 25% 29% 18% 18% 17% 16% 12% 11% 8% 8% 6%

DVD Revenues 365589 297217 239381 197,059 162,762 134,147 110,232 90,332 73,897 60,512 49,596 40,738 33,452 -19% -19% -19% -18% -17% -18% -18% -18% -18% -18% -18% -18% -18%

TOTAL REVENUES 15,794,341 20,156,447 24,996,056 32,027,038 37,819,486 44,563,534 52,087,870 60,300,066 67,487,864 75,158,694 80,894,973 87,271,922 92,874,970

Geographical Revenue (Streaming)United Sates and Canada (UCAN)Revenues 8,281,532 10,051,208 11,455,396 12,781,092 13,822,751 14,663,174 15,554,695 16,500,420 17,503,646 18,389,330 19,319,830 20,297,414 21,324,463 UCAN Price 133.92 150.84 159.84 164.64 169.57 172.97 176.43 179.95 183.55 187.22 190.97 194.79 198.68 UCAN Price per subscription Growth 13% 6% 3.0% 3.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%UCAN # of Subscribers 64757 67662 73936 77633 81514 84775 88166 91693 95360 98221 101168 104203 107329UCAN Subscriber Growth 4.49% 9.27% 5.0% 5.0% 4.0% 4.0% 4.0% 4.0% 3.0% 3.0% 3.0% 3.0%

Europe, Middle East, and Africa (EMEA)Revenues 3,963,707 5,543,067 7,772,252 11,046,790 13,653,832 16,712,290 20,455,843 23,994,704 26,922,058 29,657,339 31,763,010 34,018,184 36,433,475 EMEA Price per subscription 125.4 123.96 128.64 132.50 136.47 139.20 141.99 144.83 147.72 150.68 153.69 156.77 159.90 EMEA Price per subscription Growth -1% 4% 3% 3% 2% 2% 2% 2% 2% 2% 2% 2%EMEA # of Subscribers 37818 51778 66698 83373 100047 120056 144068 165678 182246 196825 206667 217000 227850EMEA Subscriber Growth 36.91% 28.82% 25% 20% 20% 20% 15% 10% 8% 5% 5% 5%

Latin America (LATAM)Revenues 2,237,697 2,795,434 3,156,727 3,859,179 4,438,056 5,015,003 5,516,503 6,128,835 6,685,333 7,292,362 7,810,119 8,284,975 8,704,194 LATAM Price per subscription 98.28 98.52 89.40 89.40 89.40 89.40 89.40 90.29 91.20 92.11 93.95 95.83 97.75 LATAM Price per subscription Growth 0% -9% 0% 0% 0% 0% 1% 1% 1% 2% 2% 2%LATAM Subscribers 26077 31471 37537 43,168 49,643 56,096 61,706 67,876 73,307 79,171 83,130 86,455 89,048 LATAM Subsciber Growth 21% 19% 15% 15% 13% 10% 10% 8% 8% 5% 4% 3%

Asia-Pacific (APAC)

Revenues 945,816 1,469,521 2,372,300 4,142,919 5,742,086 8,038,920 10,450,596 13,585,775 16,302,930 19,759,151 21,952,417 24,630,612 26,379,385

APAC Price per subscription 111.96 110.88 109.44 108.35 107.26 107.26 107.26 107.26 107.26 108.33 109.42 111.61 113.84

APAC Price per subscription Growth -1% -1% -1% -1% 0% 0% 0% 0% 1% 1% 2% 2%APAC Subscribers 10,607 16233 25492 38238 53533 74946 97430 126660 151991 182390 200629 220692 231726APAC Subscriber Growth 53.04% 57.04% 50% 40% 40% 30% 30% 20% 20% 10% 10% 5%

Domestic Streaming Revenue 8,281,532 10,051,208 11,455,396 12,781,092 13,822,751 14,663,174 15,554,695 16,500,420 17,503,646 18,389,330 19,319,830 20,297,414 21,324,463

International Streaming Revenue 7,147,220 9,808,022 13,301,279 19,048,888 23,833,974 29,766,213 36,422,943 43,709,314 49,910,322 56,708,852 61,525,547 66,933,770 71,517,055

TOTAL STREAMING REVENUE 15428752 19,859,230 24,756,675 31,829,979 37,656,724 44,429,387 51,977,637 60,209,735 67,413,967 75,098,182 80,845,377 87,231,184 92,841,518

Streaming Growth 37% 29% 25% 29% 18% 18% 17% 16% 12% 11% 8% 8% 6%

TOTAL DVD Revenues 365589 297217 239381 197059 162762 134147 110232 90332 73897 60512 49596 40738 33452DVD growth -19% -19% -19% -18% -17% -18% -18% -18% -18% -18% -18% -18% -18%

TOTAL GLOBAL REVENUE 15,794,341 20,156,447 24,996,056 32,027,038 37,819,486 44,563,534 52,087,870 60,300,066 67,487,864 75,158,694 80,894,973 87,271,922 92,874,970

NetflixIncome Statement

Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030ERevenues 15,794,341 20,156,447 24,996,056 32,027,038 37,819,486 44,563,534 52,087,870 60,300,066 67,487,864 75,158,694 80,894,973 87,271,922 92,874,970 Cost of revenues (Excluding D&A) 2,352,293 3,120,387 4,353,697 5,284,461 6,240,215 7,352,983 8,594,498 9,949,511 11,135,498 12,401,185 13,347,671 14,399,867 15,324,370 Depreciation and Amortization 7,615,245 9,319,826 10,922,622 13,720,192 14,060,857 15,588,998 17,832,484 20,669,360 23,967,465 27,795,260 32,235,163 37,198,873 42,839,838 Marketing 2,369,469 2,652,462 2,228,362 2,882,433 3,403,754 4,010,718 4,687,908 5,427,006 6,073,908 6,764,282 7,280,548 7,854,473 8,358,747 Technology & development 1,221,814 1,545,149 1,829,600 2,402,028 2,836,461 3,342,265 3,906,590 4,522,505 5,061,590 5,636,902 6,067,123 6,545,394 6,965,623 General & administrative 630,294 914,369 1,076,486 1,409,190 1,664,057 1,960,796 2,291,866 2,653,203 2,969,466 3,306,983 3,559,379 3,839,965 4,086,499Operating income (loss) 1,605,226 2,604,254 4,585,289 6,328,734 9,614,142 12,307,775 14,774,523 17,078,481 18,279,938 19,254,083 18,405,090 17,433,350 15,299,893Other income (expense): Interest expense 420,493 626,023 767,499 468,394 460,386 492,547 534,588 575,913 629,926 686,713 745,651 801,791 855,765 Interest & other income (expense) 41,725 84,000 (618,441) 492,333 761,145 1,187,514 1,721,033 2,341,031 3,080,549 3,841,064 4,610,912 5,307,201 5,920,743Income (loss) before income taxes 1,226,458 2,062,231 3,199,349 6,352,673 9,914,900 13,002,742 15,960,967 18,843,599 20,730,561 22,408,434 22,270,352 21,938,760 20,364,871Provision for (benefit from) income taxes 15,216 195,315 437,954 1,471,110 2,296,027 3,011,089 3,696,135 4,363,676 4,800,646 5,189,196 5,157,220 5,080,432 4,715,962Net income (loss) 1,211,242 1,866,916 2,761,395 4,881,563 7,618,874 9,991,653 12,264,832 14,479,923 15,929,916 17,219,237 17,113,131 16,858,327 15,648,909Net earnings (loss) per share - basic 2.78 4.26 6.26 10.98 17.01 22.14 26.97 31.60 34.58 37.31 37.08 36.52 33.90Year end shares outstanding 436,599 438,807 442,895 446,291 449,687 453,083 456,478 459,874 461,572 461,572 461,572 461,572 461,572Weighted average shares outstanding - basic 435,374 437,799 440,922 444,593 447,989 451,385 454,781 458,176 460,723 461,572 461,572 461,572 461,572Dividends Per Share 0 0 0 0 0 0 0 0 0 0 0 0 0

NetflixBalance Sheet

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

Cash & cash equivalents 3,794,483 5,018,437 8,205,550 12,685,754 19,791,907 28,683,878 39,017,184 51,342,491 64,017,739 76,848,533 88,453,349 98,679,052 106,378,072 Other current assets 5,899,652 1,160,067 1,556,030 1,921,622 2,269,169 2,673,812 3,125,272 3,618,004 4,049,272 4,509,522 4,853,698 5,236,315 5,572,498

Total current assets 9,694,135 6,178,504 9,761,580 14,607,376 22,061,077 31,357,690 42,142,456 54,960,495 68,067,010 81,358,054 93,307,048 103,915,367 111,950,570Content assets, net 14,960,954 24,504,567 25,383,950 25,867,627 28,597,593 32,672,972 37,856,694 43,893,041 50,906,156 59,046,535 68,141,356 78,474,697 89,835,300Property & equipment, net 418,281 565,221 960,183 1,228,480 1,497,636 1,780,263 2,086,908 2,426,997 2,809,526 3,243,577 3,738,736 4,305,436 4,955,274Other non-current assets 901,030 2,727,420 3,174,646 3,650,843 4,198,469 4,828,240 5,552,476 6,385,347 7,343,149 8,444,621 9,711,315 11,168,012 12,843,214

Total assets 25,974,400 33,975,712 39,280,359 45,354,327 56,354,775 70,639,166 87,638,533 107,665,880 129,125,842 152,092,788 174,898,455 197,863,512 219,584,358Liabilities and Stockholders' EquityCurrent Liabilities:

Current content liabilities 4,686,019 4,413,561 4,429,536 4,526,835 5,004,579 5,717,770 6,624,921 7,681,282 8,908,577 10,333,144 11,924,737 13,733,072 15,721,178Accounts payable 562,985 674,347 656,183 864,730 1,021,126 1,203,215 1,406,372 1,628,102 1,822,172 2,029,285 2,184,164 2,356,342 2,507,624Accrued expenses & other liabilities 477,417 843,043 1,102,196 1,377,163 1,626,238 1,916,232 2,239,778 2,592,903 2,901,978 3,231,824 3,478,484 3,752,693 3,993,624Deferred revenue 760,899 924,745 1,117,992 1,441,217 1,701,877 2,005,359 2,343,954 2,713,503 3,036,954 3,382,141 3,640,274 3,927,236 4,179,374Short-term debt 499,878 509,592 563,373 643,658 745,777 864,693 1,002,851 1,163,217 1,342,385 1,545,952 1,769,755

Total current liabilities 6,487,320 6,855,696 7,805,785 8,719,536 9,917,192 11,486,234 13,360,803 15,480,483 17,672,533 20,139,610 22,570,044 25,315,295 28,171,554Non-current content liabilities 3,759,026 3,334,323 2,618,084 2,845,439 3,145,735 3,594,027 4,164,236 4,828,234 5,599,677 6,495,119 7,495,549 8,632,217 9,881,883Long-term debt 10,360,058 14,759,260 15,809,095 15,520,576 16,586,604 17,970,135 19,306,914 21,068,660 22,907,770 24,799,545 26,575,129 28,250,891 29,645,649Other non-current liabilities 129,231 1,444,276 1,982,155 1,743,907 1,983,438 2,297,247 2,672,161 3,096,097 3,534,507 4,027,922 4,514,009 5,063,059 5,634,311

Total liabilities 20,735,635 26,393,555 28,215,119 28,829,459 31,632,970 35,347,643 39,504,114 44,473,473 49,714,487 55,462,195 61,154,731 67,261,461 73,333,397Stockholders' Equity:

Common stock 2,315,988 2,793,929 3,447,698 4,025,762 4,603,826 5,181,891 5,759,955 6,338,019 6,627,051 6,627,051 6,627,051 6,627,051 6,627,051Accumulated other comprehensive income (loss) -19,582 -23,521 44,398 44,398 44,398 44,398 44,398 44,398 44,398 44,398 44,398 44,398 44,398Retained earnings (accumulated deficit) 2,942,359 4,811,749 7,573,144 12,454,707 20,073,581 30,065,234 42,330,067 56,809,990 72,739,905 89,959,143 107,072,274 123,930,602 139,579,511

Total stockholders' equity (deficiency) 5,238,765 7,582,157 11,065,240 16,524,867 24,721,805 35,291,523 48,134,420 63,192,407 79,411,355 96,630,592 113,743,724 130,602,051 146,250,960Total Liabilities and Stockholders' Equity 25,974,400 33,975,712 39,280,359 45,354,327 56,354,775 70,639,166 87,638,533 107,665,880 129,125,842 152,092,788 174,898,455 197,863,512 219,584,358

NetflixHistorical Cash Flow Statement

Fiscal Years Ending Dec. 31 2018 2019 2020Cash Flows from Operating Activities:Net income (loss) 1,211,242 1,866,916 2,761,395Adjustments:

Additions to content assets (13,043,437) (13,916,683) (11,779,284)Change in content liabilities 999,880 (694,011) (757,433)Amortization of content assets 7,532,088 9,216,247 10,806,912Depreciation & amortization of property, equipment & intangibles 83,157 103,579 115,710Stock-based compensation expense 320,657 405,376 415,180Foreign currency remeasurement loss (gain) on debt (73,953) (45,576) 533,278Other non-cash items 81,640 228,230 293,126Deferred income taxes (85,520) (94,443) 70,066Changes in operating assets and liabilities:Other current assets (200,192) (252,113) (187,623)Accounts payable 199,198 96,063 (41,605)Accrued expenses & other liabilities 150,422 157,778 198,183Deferred revenue 142,277 163,846 193,247Other non-current assets & liabilities 2,062 (122,531) (194,075)Net cash flows from operating activities (2,680,479) (2,887,322) 2,427,077Cash Flows from Investing Activities:Purchases of property & equipment (173,946) (253,035) (497,923)Change in other assets (165,174) (134,029) (7,431)Net cash flows from investing activities (339,120) (387,064) (505,354)Cash Flows from Financing Activities:Proceeds from issuance of debt 3,961,852 4,469,306 1,009,464Debt issuance costs (35,871) (36,134) (7,559)Proceeds from issuance of common stock 124,502 72,490 235,406Other financing activities (1,956) - -Net cash flows from financing activities 4,048,527 4,505,662 1,237,311Effect of exchange rate changes on cash, cash equivalents & restricted cash (39,682) 469 36,050Net increase (decrease) in cash, cash equivalents & restricted cash 989,246 1,231,745 3,195,084Cash, cash equivalents & restricted cash, beginning of year 2,822,795 3,812,041 5,043,786Cash, cash equivalents & restricted cash, end of year 3,812,041 5,043,786 8,238,870Supplemental Disclosure:Income taxes paid 131,069 400,658 291,582

NetflixForecasted Cash Flow Statement

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

Net income (loss) 4,881,563 7,618,874 9,991,653 12,264,832 14,479,923 15,929,916 17,219,237 17,113,131 16,858,327 15,648,909Adjustments:

Depreciation & Amortization 13,720,192 14,060,857 15,588,998 17,832,484 20,669,360 23,967,465 27,795,260 32,235,163 37,198,873 42,839,838

Changes in Assets & Liabilities

Other Current Assets (365,592) (347,547) (404,643) (451,460) (492,732) (431,268) (460,250) (344,177) (382,617) (336,183)Additions to Content Assets (13,899,555) (16,401,475) (19,189,726) (22,451,979) (26,044,296) (30,211,383) (35,045,205) (40,301,985) (46,347,283) (52,835,903)Other Non-Current Assets (476,197) (547,626) (629,770) (724,236) (832,871) (957,802) (1,101,472) (1,266,693) (1,456,697) (1,675,202)Current Content Liabilities 97,299 477,744 713,191 907,151 1,056,361 1,227,295 1,424,566 1,591,594 1,808,335 1,988,105Accounts Payable 208,547 156,396 182,089 203,157 221,729 194,071 207,112 154,880 172,178 151,282Accrued Expenses 274,967 249,075 289,994 323,546 353,124 309,075 329,846 246,660 274,209 240,931Deferred Revenue 323,225 260,660 303,482 338,595 369,549 323,451 345,187 258,133 286,963 252,137Non-Current Content Liabilities 227,355 300,296 448,292 570,209 663,998 771,443 895,442 1,000,430 1,136,668 1,249,666Other Non-Current Liabilities (238,248) 239,531 313,808 374,914 423,936 438,410 493,415 486,087 549,050 571,252

Net cash flows from operating activities 4,753,555 6,066,785 7,607,369 9,187,214 10,868,082 11,560,672 12,103,140 11,173,222 10,098,005 8,094,834

Capital Expenditures (572,611) (658,503) (757,279) (870,870) (1,001,501) (1,151,726) (1,324,485) (1,523,158) (1,751,632) (2,014,376)Net cash flows from investing activities (572,611) (658,503) (757,279) (870,870) (1,001,501) (1,151,726) (1,324,485) (1,523,158) (1,751,632) (2,014,376)

Change is Cap. Stock 578,064 578,064 578,064 578,064 578,064 289,032 0 0 0 0Proceeds from issuance of debt (278,804) 1,119,808 1,463,816 1,438,898 1,880,662 1,977,269 2,052,140 1,954,752 1,879,329 1,618,562

Net cash flows from financing activities 299,260 1,697,872 2,041,880 2,016,962 2,458,726 2,266,301 2,052,140 1,954,752 1,879,329 1,618,562

Net Change in Cash 4,480,204 7,106,153 8,891,971 10,333,306 12,325,307 12,675,247 12,830,794 11,604,817 10,225,703 7,699,020 Cash at Beg. Period 8,205,550 12,685,754 19,791,907 28,683,878 39,017,184 51,342,491 64,017,739 76,848,533 88,453,349 98,679,052Cash at End of Period 12,685,754 19,791,907 28,683,878 39,017,184 51,342,491 64,017,739 76,848,533 88,453,349 98,679,052 106,378,072

Cash Flows from Financing Activities:

Cash Flows from Investing Activities:

Cash Flows from Operating Activities:

NetflixCommon Size Income Statement

Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030ERevenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of revenues (Excluding D&A) 14.89% 15.48% 17.42% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% 16.50% Depreciation and Amortization 48.22% 46.24% 43.70% 42.84% 37.18% 34.98% 34.24% 34.28% 35.51% 36.98% 39.85% 42.62% 46.13% Marketing 15.00% 13.16% 8.91% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% Technology & development 7.74% 7.67% 7.32% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% General & administrative 3.99% 4.54% 4.31% 4.40% 4.40% 4.40% 4.40% 4.40% 4.40% 4.40% 4.40% 4.40% 4.40%Operating income (loss) 10.16% 12.92% 18.34% 19.76% 25.42% 27.62% 28.36% 28.32% 27.09% 25.62% 22.75% 19.98% 16.47%Other income (expense): Interest expense 2.66% 3.11% 3.07% 1.46% 1.22% 1.11% 1.03% 0.96% 0.93% 0.91% 0.92% 0.92% 0.92% Interest & other income (expense) 0.26% 0.42% -2.47% 1.54% 2.01% 2.66% 3.30% 3.88% 4.56% 5.11% 5.70% 6.08% 6.37%Income (loss) before income taxes 7.77% 10.23% 12.80% 19.84% 26.22% 29.18% 30.64% 31.25% 30.72% 29.81% 27.53% 25.14% 21.93%Provision for (benefit from) income taxes 0.10% 0.97% 1.75% 4.59% 6.07% 6.76% 7.10% 7.24% 7.11% 6.90% 6.38% 5.82% 5.08%Net income (loss) 7.67% 9.26% 11.05% 15.24% 20.15% 22.42% 23.55% 24.01% 23.60% 22.91% 21.15% 19.32% 16.85%

NetflixCommon Size Balance Sheet

Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030EAssetsCurrent Assets:Cash & cash equivalents 24.02% 24.90% 32.83% 39.61% 52.33% 64.37% 74.91% 85.14% 94.86% 102.25% 109.34% 113.07% 114.54%Other current assets 37.35% 5.76% 6.23% 6.00% 7.09% 8.35% 9.76% 11.30% 12.64% 14.08% 15.16% 16.35% 17.40%

Total current assets 61.38% 30.65% 39.05% 45.61% 68.88% 97.91% 131.58% 171.61% 212.53% 254.03% 291.34% 324.46% 349.55%Content assets, net 94.72% 121.57% 101.55% 80.77% 89.29% 102.02% 118.20% 137.05% 158.95% 184.36% 212.76% 245.03% 280.50%Property & equipment, net 2.65% 2.80% 3.84% 3.84% 4.68% 5.56% 6.52% 7.58% 8.77% 10.13% 11.67% 13.44% 15.47%Other non-current assets 5.70% 13.53% 12.70% 11.40% 13.11% 15.08% 17.34% 19.94% 22.93% 26.37% 30.32% 34.87% 40.10%

Total assets 164.45% 168.56% 157.15% 141.61% 175.96% 220.56% 273.64% 336.17% 403.18% 474.89% 546.10% 617.80% 685.62%

Liabilities and Stockholders' EquityLiabilities Current Liabilities:Current content liabilities 29.67% 21.90% 17.72% 14.13% 15.63% 17.85% 20.69% 23.98% 27.82% 32.26% 37.23% 42.88% 49.09%Accounts payable 3.56% 3.35% 2.63% 2.70% 3.19% 3.76% 4.39% 5.08% 5.69% 6.34% 6.82% 7.36% 7.83%Accrued expenses & other liabilities 3.02% 4.18% 4.41% 4.30% 5.08% 5.98% 6.99% 8.10% 9.06% 10.09% 10.86% 11.72% 12.47%Deferred revenue 4.82% 4.59% 4.47% 4.50% 5.31% 6.26% 7.32% 8.47% 9.48% 10.56% 11.37% 12.26% 13.05%Short-term debt 0.00% 0.00% 2.00% 1.59% 1.76% 2.01% 2.33% 2.70% 3.13% 3.63% 4.19% 4.83% 5.53%

Total current liabilities 41.07% 34.01% 31.23% 27.23% 30.97% 35.86% 41.72% 48.34% 55.18% 62.88% 70.47% 79.04% 87.96%Non-current content liabilities 23.80% 16.54% 10.47% 8.88% 9.82% 11.22% 13.00% 15.08% 17.48% 20.28% 23.40% 26.95% 30.85%Long-term debt 65.59% 73.22% 63.25% 48.46% 51.79% 56.11% 60.28% 65.78% 71.53% 77.43% 82.98% 88.21% 92.56%Other non-current liabilities 0.82% 7.17% 7.93% 5.45% 6.19% 7.17% 8.34% 9.67% 11.04% 12.58% 14.09% 15.81% 17.59%

Total liabilities 131.29% 130.94% 112.88% 90.02% 98.77% 110.37% 123.35% 138.86% 155.23% 173.17% 190.95% 210.01% 228.97%

Stockholders' EquityCommon stock 14.66% 13.86% 13.79% 12.57% 14.37% 16.18% 17.98% 19.79% 20.69% 20.69% 20.69% 20.69% 20.69%Accumulated other comprehensive income (loss) -0.12% -0.12% 0.18% 0.14% 0.14% 0.14% 0.14% 0.14% 0.14% 0.14% 0.14% 0.14% 0.14%Retained earnings (accumulated deficit) 18.63% 23.87% 30.30% 38.89% 62.68% 93.87% 132.17% 177.38% 227.12% 280.88% 334.32% 386.96% 435.82%

Total stockholders' equity (deficiency) 33.17% 37.62% 44.27% 51.60% 77.19% 110.19% 150.29% 197.31% 247.95% 301.72% 355.15% 407.79% 456.65%

Total Liabilities and Stockholders' Equity 164.45% 168.56% 157.15% 141.61% 175.96% 220.56% 273.64% 336.17% 403.18% 474.89% 546.10% 617.80% 685.62%

NetflixValue Driver Estimation

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

NOPLAT:

Revenues 15,794,341 20,156,447 24,996,056 32,027,038 37,819,486 44,563,534 52,087,870 60,300,066 67,487,864 75,158,694 80,894,973 87,271,922 92,874,970 Less: Cost of Revenues 2,352,293 3,120,387 4,353,697 5,284,461 6,240,215 7,352,983 8,594,498 9,949,511 11,135,498 12,401,185 13,347,671 14,399,867 15,324,370 Less: Marketing Expense 2,369,469 2,652,462 2,228,362 2,882,433 3,403,754 4,010,718 4,687,908 5,427,006 6,073,908 6,764,282 7,280,548 7,854,473 8,358,747 Less: Technology and Development 1,221,814 1,545,149 1,829,600 2,402,028 2,836,461 3,342,265 3,906,590 4,522,505 5,061,590 5,636,902 6,067,123 6,545,394 6,965,623 Less: General and administrative 630,294 914,369 1,076,486 1,409,190 1,664,057 1,960,796 2,291,866 2,653,203 2,969,466 3,306,983 3,559,379 3,839,965 4,086,499 Less: Depreciation & Amortization 7,615,245 9,319,826 10,922,622 13,720,192 14,060,857 15,588,998 17,832,484 20,669,360 23,967,465 27,795,260 32,235,163 37,198,873 42,839,838 Add: Implied Interest on Operating Leases 18,667 41,469 50,854 64,394 65,621 72,547 82,885 96,035 111,348 129,139 149,790 172,862 199,076 EBITA: 1,623,893 2,645,723 4,636,143 6,393,128 9,679,763 12,380,322 14,857,408 17,174,517 18,391,286 19,383,222 18,554,880 17,606,212 15,498,969 Income Tax Provision 15,216 195,315 437,954 1,471,110 2,296,027 3,011,089 3,696,135 4,363,676 4,800,646 5,189,196 5,157,220 5,080,432 4,715,962 Tax Shield on Interest Expense 121,605 163,299 177,732 108,468 106,613 114,061 123,796 133,366 145,874 159,024 172,673 185,673 198,172 Tax on interest and Other income (12,067) (21,912) 143,214 (114,011) (176,261) (274,997) (398,545) (542,120) (713,373) (889,488) (1,067,764) (1,229,006) (1,371,086) Tax Shield on Operating Lease Interest 5,398 10,817 11,776 14,912 15,196 16,800 19,194 22,239 25,785 29,905 34,687 40,030 46,101 Less: Total Adjusted Taxes 130,152 347,520 770,677 1,480,478 2,241,575 2,866,953 3,440,580 3,977,161 4,258,932 4,488,638 4,296,816 4,077,130 3,589,148

Add: Change in Deferred Tax Liabilities (85,520) (94,443) 70,066

NOPLAT: 1,408,221 2,203,760 3,935,532 4,912,650 7,438,188 9,513,369 11,416,828 13,197,356 14,132,354 14,894,584 14,258,064 13,529,082 11,909,820

Invested Capital (IC):Operating Current Assets:

"Normal" Cash 1,270,323 1,621,163 2,010,408 2,575,903 3,041,784 3,584,201 4,189,376 4,849,875 5,427,982 6,044,940 6,506,303 7,019,195 7,469,842 Total Other Current Assests 5,899,652 1,160,067 1,556,030 1,921,622 2,269,169 2,673,812 3,125,272 3,618,004 4,049,272 4,509,522 4,853,698 5,236,315 5,572,498

Total Operating Current Assets 7,169,975 2,781,230 3,566,438 4,497,525 5,310,953 6,258,013 7,314,648 8,467,879 9,477,254 10,554,461 11,360,001 12,255,510 13,042,341 Operating Current Liabilities:

Current Content Liabilities 4,686,019 4,413,561 4,429,536 4,526,835 5,004,579 5,717,770 6,624,921 7,681,282 8,908,577 10,333,144 11,924,737 13,733,072 15,721,178 Accounts Payable 562,985 674,347 656,183 864,730 1,021,126 1,203,215 1,406,372 1,628,102 1,822,172 2,029,285 2,184,164 2,356,342 2,507,624 Accrued Expenses 477,417 843,043 1,102,196 1,377,163 1,626,238 1,916,232 2,239,778 2,592,903 2,901,978 3,231,824 3,478,484 3,752,693 3,993,624 Deferred Revenue 760,899 924,745 1,117,992 1,441,217 1,701,877 2,005,359 2,343,954 2,713,503 3,036,954 3,382,141 3,640,274 3,927,236 4,179,374

Total Operating Current Liabilities 6,487,320 6,855,696 7,305,907 8,209,944 9,353,820 10,842,577 12,615,026 14,615,790 16,669,682 18,976,393 21,227,659 23,769,343 26,401,799 Net Operating Working Capital 682,655 (4,074,466) (3,739,469) (3,712,419) (4,042,866) (4,584,563) (5,300,378) (6,147,911) (7,192,427) (8,421,932) (9,867,658) (11,513,833) (13,359,458)

Net PPE 418,281 565,221 960,183 1,228,480 1,497,636 1,780,263 2,086,908 2,426,997 2,809,526 3,243,577 3,738,736 4,305,436 4,955,274 Content Assets, Net 14,960,954 24,504,567 25,383,950 25,867,627 28,597,593 32,672,972 37,856,694 43,893,041 50,906,156 59,046,535 68,141,356 78,474,697 89,835,300 PV of Operating Leases 1,443,898 1,770,688 2,242,144 2,284,867 2,526,002 2,885,977 3,343,851 3,877,037 4,496,499 5,215,532 6,018,871 6,931,606 7,935,079 Other Assets

Other Operating Assets 16,404,852 26,275,255 27,626,094 28,152,494 31,123,595 35,558,950 41,200,544 47,770,077 55,402,656 64,262,067 74,160,227 85,406,304 97,770,379 Non-Current Content Liabilities 3,759,026 3,334,323 2,618,084 2,845,439 3,145,735 3,594,027 4,164,236 4,828,234 5,599,677 6,495,119 7,495,549 8,632,217 9,881,883 Other Liabilities

Other Operating Liabilities 3,759,026 3,334,323 2,618,084 2,845,439 3,145,735 3,594,027 4,164,236 4,828,234 5,599,677 6,495,119 7,495,549 8,632,217 9,881,883 TOTAL INVESTED CAPITAL 13,746,762 19,431,687 22,228,724 22,823,116 25,432,629 29,160,623 33,822,838 39,220,930 45,420,077 52,588,594 60,535,756 69,565,690 79,484,311

Free Cash Flow (FCF):NOPLAT 1,408,221 2,203,760 3,935,532 4,912,650 7,438,188 9,513,369 11,416,828 13,197,356 14,132,354 14,894,584 14,258,064 13,529,082 11,909,820 Change in IC 5,414,835 5,684,925 2,797,037 594,392 2,609,513 3,727,993 4,662,216 5,398,091 6,199,148 7,168,516 7,947,162 9,029,934 9,918,622 FCF (4,006,615) (3,481,165) 1,138,495 4,318,257 4,828,675 5,785,376 6,754,612 7,799,265 7,933,206 7,726,068 6,310,902 4,499,148 1,991,199

Return on Invested Capital (ROIC):NOPLAT 1,408,221 2,203,760 3,935,532 4,912,650 7,438,188 9,513,369 11,416,828 13,197,356 14,132,354 14,894,584 14,258,064 13,529,082 11,909,820 Beginning IC 8,331,927 13,746,762 19,431,687 22,228,724 22,823,116 25,432,629 29,160,623 33,822,838 39,220,930 45,420,077 52,588,594 60,535,756 69,565,690 ROIC 16.90% 16.03% 20.25% 22.10% 32.59% 37.41% 39.15% 39.02% 36.03% 32.79% 27.11% 22.35% 17.12%

Economic Profit (EP):

Beginning IC 8,331,927 13,746,762 19,431,687 22,228,724 22,823,116 25,432,629 29,160,623 33,822,838 39,220,930 45,420,077 52,588,594 60,535,756 69,565,690 x (ROIC - WACC) 11.21% 10.34% 14.57% 16.41% 26.90% 31.72% 33.46% 33.33% 30.35% 27.11% 21.43% 16.66% 11.43%EP 934,371 1,421,961 2,830,423 3,648,469 6,140,203 8,066,977 9,758,419 11,273,800 11,901,801 12,311,476 11,267,272 10,086,322 7,953,515

NetflixWeighted Average Cost of Capital (WACC) Estimation

Cost of Equity:Risk-Free Rate 1.68%Beta 0.92 Equity Risk Premium 4.63%Cost of Equity 5.95%

Cost of Debt:Risk-Free Rate 1.68%Implied Default Premium 1.19%Pre-Tax Cost of Debt 2.87%Marginal Tax Rate 23%After-Tax Cost of Debt 2.21%

Market Value of Common Equity:Total Shares Outstanding 442,895 Current Stock Price $552.78MV of Equity 244,823,498

Market Value of Debt:Short-Term Debt 499,878 Long-Term Debt 15,809,095 PV of Operating Leases 2,242,144 MV of Total Debt 18,551,117

Market Value of the Firm 263,374,615

Equity Component:Cost of Equity 5.95%Weight of Equity 92.96%Equity Component 5.53%

Debt Component:After-Tax Cost of Debt 2.21%Weight of Debt 7.04%Debt Component 0.16%

WACC:Equity Component 5.53%Debt component 0.16%

5.69%

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

Key Inputs: CV Growth of NOPLAT 3.00% CV Year ROIC 17.12% WACC 5.69% Cost of Equity 5.95%

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

DCF Model:Free Cash Flow (FCF) 4,318,257 4,828,675 5,785,376 6,754,612 7,799,265 7,933,206 7,726,068 6,310,902 4,499,148 1,991,199Continuing Value (CV) 365,548,852PV of FCF 4,085,887 4,322,983 4,900,778 5,413,918 5,914,836 5,692,665 5,245,697 4,054,282 2,734,831 222,200,844

Value of Operating Assets: 264,566,721Non-Operating AdjustmentsExcess Cash 6,195,142Other non-current assets 3,174,646Short Term Debt -499,878Long Term Debt -15,809,095PV Operating Leases -2,242,144

Value of Equity 255,385,392Shares Outstanding 442,895Intrinsic Value of Last FYE 576.63$ Implied Price as of Today 586.02$

EP Model:Economic Profit (EP) 3,648,469 6,140,203 8,066,977 9,758,419 11,273,800 11,901,801 12,311,476 11,267,272 10,086,322 7,953,515Continuing Value (CV) 295,983,162PV of EP 3,452,140 5,497,159 6,833,516 7,821,512 8,549,867 8,540,426 8,359,009 7,238,378 6,131,025 179,914,964

Total PV of EP 242,337,997Invested Capital (last FYE) 22,228,724Value of Operating Assets: 264,566,721Non-Operating AdjustmentsExcess Cash 6,195,142Other non-current assets 3,174,646Short Term Debt -499,878Long Term Debt -15,809,095PV Operating Leases -2,242,144

Value of Equity 255385392.2Shares Outstanding 442895.3Intrinsic Value of Last FYE 576.63$ Implied Price as of Today 586.02$

NetflixDividend 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 10.98$ 17.01$ 22.14$ 26.97$ 31.60$ 34.58$ 37.31$ 37.08$ 36.52$ 33.90$

Key Assumptions CV growth of EPS 3.00%

CV Year ROE 11.98%

Cost of Equity 5.95%

Future Cash Flows P/E Multiple (CV Year) 25.40

EPS (CV Year) 33.90$

Future Stock Price 861$

Dividends Per Share 0 0 0 0 0 0 0 0 0

Discounted Cash Flows 511.92$

Intrinsic Value as of Last FYE 511.92$

Implied Price as of Today 520.26$

NetflixRelative Valuation Models

EPS EPSTicker Company Price 2020E 2021E P/E 20 P/E 21 EBITDA EV/EBITDA Weightings CMCSA Comcast A $54.75 $2.61 $2.85 20.98 19.21 30836.0 19.40x 16%APPL Apple $134.16 $3.28 $4.44 35.30 29.80 77344.0 26.10x 10%AMZN Amazon $3,161.00 $41.83 $47.95 75.57 65.92 57284.0 41.80x 10%T AT&T $30.47 $3.18 $3.12 9.58 9.77 54546.0 7.30x 16%DIS Walt Disney $188.97 $2.02 $2.00 93.55 94.49 10102.0 31.70x 16%VIAC ViacomCBS $41.88 $4.20 $4.03 9.97 10.39 5132 2.70x 16%DISCA Discovery $42.00 $3.20 $2.87 13.13 14.63 4196 7.60x 16%SPOT Spotify $292.02 ($3.72) ($2.06) (78.50) (141.76) -219 -312.50x 0%

Weighted Average 34.64 33.33 17.78x 100%

NFLX Netflix $552.78 $6.26 $10.98 88.3 50.3 15507.9 16.37x

Relative Implied Share Price: P/E (EPS20) $ 216.84 P/E (EPS21) 365.96$ = removed from calculation as an outlier

EV/EBITDA Multiple Implied Share Price:Netflix 2020 EBITDA 15,507.90$ x EV/EBITDA Implied Multiple 17.78 Enterprise Value 275,761.48$ - Debt 20,738.51$ + Cash 8,205.55$ ÷ DSO 455.3

Implied Share Price 578.14$

NetflixKey Management Ratios

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

Liquidity Ratios:Current Ratio 1.49 0.90 1.25 1.68 2.22 2.73 3.15 3.55 3.85 4.04 4.13 4.10 3.97

CFO/Current Liabilities (41.32) (42.12) 31.09 3.88 3.62 3.53 3.45 3.08 2.52 2.21 1.72 1.47 1.04

Cash Ratio 0.58 0.73 1.05 1.45 2.00 2.50 2.92 3.32 3.62 3.82 3.92 3.90 3.78

Asset-Management Ratios:Total Asset Turnover (Sales/ Total Assets) 0.61 0.59 0.64 0.71 0.67 0.63 0.59 0.56 0.52 0.49 0.46 0.44 0.42

Working Capital Turnover Ratio (sales/WC) 23.14 -4.95 -6.68 -8.63 -9.35 -9.72 -9.83 -9.81 -9.38 -8.92 -8.20 -7.58 -6.95

PP&E Turnover (PPE/Sales) 37.76 35.66 26.03 26.07 25.25 25.03 24.96 24.85 24.02 23.17 21.64 20.27 18.74

Financial Leverage Ratios:Debt to Assets ( Total Debt/ Total Assets) 0.58 0.56 0.53 0.45 0.39 0.34 0.30 0.28 0.25 0.24 0.23 0.22 0.21

Debt to Equity Ratio (Total Debt/Total Equity) 2.87 2.53 1.87 1.24 0.90 0.69 0.55 0.47 0.41 0.38 0.35 0.33 0.32

Debt to EBITDA (Total Debt/EBITDA) 1.63 1.61 1.34 1.03 0.94 0.87 0.82 0.78 0.78 0.77 0.79 0.80 0.81

Profitability Ratios:Return on Equity (NI/Beg TSE) 33.82% 35.64% 36.42% 44.12% 46.11% 40.42% 34.75% 30.08% 25.21% 21.68% 17.71% 14.82% 11.98%

Return on Assets (NI/ Total assets) 4.66% 5.49% 7.03% 10.76% 13.52% 14.14% 13.99% 13.45% 12.34% 11.32% 9.78% 8.52% 7.13%

Gross Margins (Gross Profit/Sales) 10.16% 12.92% 18.34% 19.76% 25.42% 27.62% 28.36% 28.32% 27.09% 25.62% 22.75% 19.98% 16.47%

Payout Policy Ratios:Dividend Payout Ratio (Dividend/EPS) 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

Total Payout Ratio ((Divs. + 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

Free Cashflow to Equity (FCF/TSE) -76.48% -45.91% 10.29% 26.13% 19.53% 16.39% 14.03% 12.34% 9.99% 8.00% 5.55% 3.44% 1.36%

NetflixEffects of ESOP Exercise and Share Repurchases on Common Stock Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 18,677Average Time to Maturity (years): 5.50Expected Annual Number of Options Exercised: 3,396

Current Average Strike Price: 170.23$ Cost of Equity: 5.95%Current Stock Price: $552.78

Fiscal Years Ending Dec. 31 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030EIncrease in Shares Outstanding: 3,396 3,396 3,396 3,396 3,396 1,698Average Strike Price: 170.23$ 170.23$ 170.23$ 170.23$ 170.23$ 170.23$ 170.23$ 170.23$ 170.23$ 170.23$ Increase in Common Stock Account: 578,064 578,064 578,064 578,064 578,064 289,032 - - - -

Share Repurchases ($) 0 0 0 0 0 0 0 0 0 0Expected Price of Repurchased Shares: 552.78$ 585.68$ 620.53$ 657.45$ 696.58$ 738.03$ 781.95$ 828.48$ 877.79$ 930.02$ Number of Shares Repurchased: - - - - - - - - - -

Shares Outstanding (beginning of the year) 442,895 446,291 449,687 453,083 456,478 459,874 461,572 461,572 461,572 461,572Plus: Shares Issued Through ESOP 3,396 3,396 3,396 3,396 3,396 1,698 0 0 0 0Less: Shares Repurchased in Treasury - - - - - - - - - - Shares Outstanding (end of the year) 446,291 449,687 453,083 456,478 459,874 461,572 461,572 461,572 461,572 461,572

NetflixSensitivity Tables

586.02 0.77 0.82 0.87 0.92 0.97 1.02 1.07 586.02 21.56% 22.16% 22.56% 23.16% 23.56% 24.16% 24.56%4.48% 837.20 750.64 679.52 617.89 569.62 526.30 488.69 1.38% 677.42 670.90 666.54 660.04 655.65 649.10 644.73 4.53% 821.01 736.60 667.16 606.91 559.69 517.27 480.43 1.48% 650.46 644.16 639.96 633.68 629.44 623.12 618.90 4.58% 805.41 723.05 655.21 596.29 550.08 508.53 472.42 1.58% 625.44 619.35 615.29 609.22 605.12 599.01 594.93 4.63% 790.35 709.95 643.66 586.02 540.76 500.06 464.66 1.68% 601.71 595.82 591.89 586.02 582.05 576.15 572.20 4.68% 775.81 697.30 632.48 576.06 531.74 491.84 457.12 1.78% 580.45 574.73 570.92 565.23 561.39 555.66 551.84 4.73% 761.78 685.06 621.65 566.42 522.99 483.87 449.81 1.88% 560.14 554.60 550.91 545.38 541.66 536.10 532.40 4.78% 748.21 673.22 611.17 557.07 514.50 476.13 442.70 1.98% 541.11 535.74 532.15 526.79 523.17 517.78 514.18

586.02 5.39% 5.49% 5.59% 5.69% 5.79% 5.89% 5.99% 586.02 5.20% 5.45% 5.70% 5.95% 6.20% 6.45% 6.70%3.30% 735.58 699.74 667.04 637.90 609.54 584.14 560.64 2.27% 590.50 590.89 591.28 591.68 592.06 592.45 592.84 3.20% 710.08 676.85 646.42 619.22 592.64 568.77 546.61 2.47% 588.62 589.01 589.40 589.79 590.17 590.56 590.95 3.10% 686.80 655.89 627.47 601.97 577.00 554.50 533.56 2.67% 586.74 587.13 587.52 587.91 588.29 588.68 589.07 3.00% 665.47 636.60 609.98 586.02 562.48 541.21 521.38 2.87% 584.85 585.24 585.63 586.02 586.40 586.79 587.17 2.90% 645.85 618.81 593.78 571.21 548.97 528.82 509.99 3.07% 583.01 583.40 583.79 584.17 584.56 584.94 585.32 2.80% 627.75 602.34 578.75 557.42 536.35 517.23 499.31 3.27% 581.16 581.55 581.93 582.32 582.70 583.08 583.47 2.70% 610.99 587.04 564.76 544.56 524.56 506.36 489.28 3.47% 579.32 579.70 580.09 580.47 580.85 581.24 581.62

586.02 15.00% 15.50% 16.00% 16.50% 17.00% 17.50% 18.00% 586.02 15.62% 16.12% 16.62% 17.12% 17.62% 18.12% 18.62%6.00% 783.97 761.98 739.98 717.99 695.99 674.00 652.00 3.30% 625.02 629.58 633.86 637.90 641.70 645.30 648.70 7.00% 739.98 717.99 695.99 674.00 652.00 630.01 608.01 3.20% 607.22 611.47 615.46 619.21 622.76 626.10 629.27 8.00% 695.99 674.00 652.00 630.01 608.01 586.02 564.02 3.10% 590.81 594.76 598.48 601.97 605.27 608.39 611.34 9.00% 652.00 630.01 608.01 586.02 564.02 542.03 520.03 3.00% 575.61 579.30 582.76 586.02 589.09 591.99 594.74

10.00% 608.01 586.02 564.02 542.03 520.03 498.04 476.04 2.90% 561.51 564.94 568.17 571.20 574.07 576.78 579.34 11.00% 564.02 542.03 520.03 498.04 476.04 454.05 432.05 2.80% 548.38 551.58 554.59 557.42 560.09 562.61 565.00 12.00% 520.03 498.04 476.04 454.05 432.05 410.06 388.07 2.70% 536.13 539.11 541.92 544.55 547.04 549.39 551.62

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