Netflix Company Valuation

Netflix, Inc.

Adopt-A-Company

Company Biography

Netflix, Inc. was founded in 1997 by Marc Randolph and Reed Hastings as a DVD rent-by-mail company. By introducing its one-of-a-kind mail-order subscription service, expanding its DVD offerings and increasing its distribution facilities, Netflix, Inc. changed the DVD rental market forever. In 2002, the company made an initial public offering of 5.5 million shares at $15.00 per share on Nasdaq and, in ¬¬¬2007, the company introduced instant streaming. Customers increasingly gravitated towards instant streaming content and now streaming video is the core of the company's business plan.

On July 12, 2011, Netflix, Inc. announced that it would separate the company into an unlimited streaming subsidiary and an unlimited DVD rent-by-mail subsidiary. Due to customer backlash and the loss of an estimated 800,000 subscribers, Netflix, Inc. announced on October 10, 2011 that it would not be split the companies. The day after the announcement, the Netflix, Inc. stock price reached its highest stock price in history at $298.73 per share. By November of the same year, the stock price had plunged to $63.86.

Analysis Background

To begin the analysis of Netflix, Inc., the group researched possible competitors, but quickly discovered that there were no other companies that could be used for comparison. Potential competitors included Redbox, Blockbuster, Hulu, and Amazon Instant Video. Unfortunately, Redbox is privately owned and does not publish financial statements; Blockbuster, after recently filing for bankruptcy, was bought out by Dish Network; Hulu is owned by Disney and NBC; and Amazon Instant Video is owned by Amazon.com. The revenues and expenses for Blockbuster, Hulu and Amazon Instant Video are combined with the revenues of other non-related services and are unable to be separated out for individual analysis purposes. As an alternative, the group used ratios from the Troy Almanac for "Other Consumer Goods and General Rental Centers" (Appendix 1).While not a perfect comparable, it did provide an alternative for ratio analysis but eventually proved incompatible for use in the valuation section of the company analysis. Since Netflix, Inc. does not issue dividends and does not have any direct competitors, the group chose the discounted free cash flow (DFCF) method for valuation (Appendix 2).

Ratio Analysis

In the group's short-term ratio analysis, Netflix, Inc. is a sustainable company based on its financials and therefore is not considered a large risk for investors. Netflix, Inc. has a current ratio of 1.49, while the industry average is 0.7; this difference is due to the large increase in current content library that Netflix incurred in 2011. The cash ratio for Netflix, Inc. indicates the company is able to cover 40% of its current liabilities with cash.

In the long run, Netflix, Inc.'s debt to equity ratio is 0.62 which means Netflix, Inc. uses more equity financing than debt. While Netflix, Inc.'s total debt ratio is 0.79, the industry average is 0.78. This shows that Netflix, Inc., like the industry average, uses a good balance of both debt and equity for financing. Additionally, Netflix, Inc.'s interest coverage ratio of 18.77 verifies that Netflix, Inc. is not burdened by interest expenses and can pay its interest expenses as they arise.

In terms of profitability, a gross profit margin of 36% means that Netflix, Inc. gains a gross profit of $0.36 from each dollar of revenue. The return on equity (ROE) determines the return the firm gains from its investments. Netflix, Inc. has an ROE of 35% which is considered to be a signal of high returns for investors. Netflix, Inc. has a return on assets (ROA) ratio of 0.07, while the industry is 3.5. Again, this is because of the substantial increase in current assets during 2011.

Through the ratio analysis, the group concluded that Netflix, inc. is not considered to be a large risk at this time. Netflix, Inc. is able to pay off its liabilities if the company were liquidated and is able to turn