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Netflix (NFLX)HBO Go Concerns Holding it Back… For NowLONG, TP $450 (+16%)

RESEARCH TEAM

Parker Kim, Senior DirectorPearce Illmer, Senior AnalystJack Butler, Junior AnalystAnkit Tiwari, AnalystJon Burston, Analyst

Investment Thesis

November 2014Parker Kim, Pearce Illmer, Jack Butler, Ankit Tiwari, Jon Burstain

“

Investment ThesisHBO Go and Intl Concerns Weighing on NFLX… For Now

HBO Competition and Poor Intl Growth Weigh on NFLX …but NFLX and HBO are not substitutes for each other

…While international growth is still on a strong trajectory for success

…there’s not much of a change in the competitive landscape. We and HBO have significantly different content. I don’t think there will be a significant impact at the consumer level.

-Reed Hastings, CEO on 3Q14 Call

“

Company Overview


Company OverviewNFLX Competitive Advantages Hold Subscribers In

Proprietary collection of customer viewing data to address issue of “too much, what do I watch”

Selection Quality: over 20,000 streaming titles both original and licensed content

Binge-friendly: Entire seasons available all at once, program designed to keep playing

Original content: House of Cards, OITNB draw in additional viewership


Company OverviewFinancial and Operating Statistics Overview

2010A-2016E Revenue and EBITDA ($USD mns) Revenue Growth Rates and EBITDA Margin

Subscriber Growth is Up to 50mn, Driven by Intl

NFLX is still growing incredibly fast despite news headlines that it may

be losing steam. It’s 50mn subscribers make it the largest

business of its kind.


Company OverviewReed Hastings: A Management Consideration that’s Not BS

Work Experience

Experience CEO of Charter Fund President/CEO of Pure Atria Software Chairman of DreamBox Learning Director of Facebook Director of Startup America Director of Microsoft President of California State Board of

Education MSCS from Stanford University

Management Philosophy: Freedom and Responsibility

No vacation policy – leave if you’re doing a great job and covering your

responsibilities.

Retain “outstanding” employees only. Mediocrity will not suffice.

No “brilliant jerks” – star performers that are hell to work with are sent packing.

“Freedom and responsibility” – managers give employees the right context to make

decisions.

“ “

Hastings knew DVDs were a dying business even when founding Netflix in 1997

and from the beginning Netflix has invested in software for its transition to internet.

Netflix has been a media company, not a DVD company, from the beginning, and has

been successful thanks to Hastings’ pioneering vision for industry direction.

Industry Overview


Industry OverviewGrowth Prospects for NFLX Lie in International Markets

International Subscriber Growth Projections

Latin America will drive a majority of

the growth

European Expansion Efforts Have Already Started

Recently Expanded Germany France Italy Spain Russia Poland Austria

Previously Entered Britain Ireland Netherlands Sweden Finland Norway

Potential Risks of Entry

Competition from existing Snap, Canal+ in France and Germany

French media consumption habits are focused on free rebroadcasts of network

and cable TV

But NFLX’s low price point should be able to penetrate as it did in GBR

Neither have in-house productions like NFLX which was key for GBR expansion


Industry OverviewCompetition Exists- But Little Overlap Exists and NFLX Thrives

Subscriber Base of Competition & Retention Rates HBO Go Characteristics

$15/month for online only subscription Rollout is expected in 2015 Not a Real Substitute

Premium HBO-only shows like GoT Some movie overlap but focus is on

its in-house TV-shows

Higher retention rates mean each customer acquisition has a higher return on investment and

are less risky.

Overlap of Top 200 Movies and TV Shows

NFLX200

AMZN73Hulu

27


Industry OverviewPorters 5 Forces Industry Analysis Indicates Favorable Industry

Licensing relationships for content are difficult to acquire for new entrants

Several related platforms, but in-house studios provide unique, must-have content

Content library size key differentiator

Hulu, AMZN, HBO, Showtime, Starz all offer premium content through online platforms

Differentiated content helps justify purchase

Cable TV numbers have grown slowly, but alternatives have largely fizzled out in favor of online streaming

Licensors generally enter monopoly or duopoly contracts for their shows, and bidding for key content is necessary

HIGH

LOW

MODERATE

LOW

HIGH

Porter’s AssessmentIndustry Dynamic Rationale

Barriers to Entry

Bargaining Power of Buyers

Intensity of Rivalry

Threat of Substitutes

Bargaining Power of Suppliers

Risk Overview


Risk OverviewRisks Concentrated on Continued Content Acquisition

Competition for Content Content Acquisition Weak Competitive Moat

Content creators license out content to NFLX and its competitors. Competition for popular content can lead to bidding wars or NFLX losing out which could potentially cause subscribers to leave.

NFLX’s business model is reliant on continually adding customers to grow revenue since price stays the same.

Failure to acquire quality content will lead to stagnant growth.

NFLX’s #1 subscriber base is more due to its head start rather than a strong competitive moat. Thus, NFLX must manage its customer base carefully.

Massive scale of NFLX Suppliers get benefit of

larger viewerbase

Original content production

Users don’t expect immediate new content

Content offering has been a key differentiator that will retain customers

Investment Thesis


“

Investment ThesisHBO Go and Intl Concerns Weighing on NFLX… For Now

HBO Competition and Poor Intl Growth Weigh on NFLX …but NFLX and HBO are not substitutes for each other

…While international growth is still on a strong trajectory for success

…there’s not much of a change in the competitive landscape. We and HBO have significantly different content. I don’t think there will be a significant impact at the consumer level.

-Reed Hastings, CEO on 3Q14 Call

“

Netflix (NFLX)HBO Go Concerns Holding it Back… For NowLONG, TP $450 (+16%)

RESEARCH TEAM

Parker Kim, Senior DirectorPearce Illmer, Senior AnalystJack Butler, Junior AnalystAnkit Tiwari, AnalystJon Burston, Analyst

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Presentations & Public Speaking