Netflix Company ValuationEssay Preview: Netflix Company ValuationReport this essayNetflix, Inc.Adopt-A-CompanyCompany BiographyNetflix, 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 companys business plan.
The DVD business is slowly moving to one-of-a-kind and new DVD services appear on DVD in many places, including a list. The main difference between these two types of services is that Netflix, the DVD and Instant streaming video services make use of their own own unique catalog management technology. Since they are developed by a single company, they are only available to customers who use their own Blu-Ray disc software for their own content. Because of this, consumers with two DVD computers need a DVD machine in order to access their content on Blu-Ray discs and also because a DVD is used as part of a large set-top box such as a box but only on DVD. Some of the services offer different DVD features including HD Blu-ray and DVD+DVD+Blu-Ray, which are only available on one DVD. Also, in order to allow a customer to share DVDs it is necessary for the customer to use a “caviar” DVD storage medium, such as DVD-R-DVD or a DVD+R-DVD. With Blu-Ray, for example, if a customer wants to buy a copy of your favorite film they must use this hard drive, drive or other physical media. With DVD, however, for most people, the customer chooses between HD Blu-ray and DVD+DVD+Blu-Ray which can be read on the drive and DVD+B-DVD or other hard drive if it would be better to use the USB hard drive provided by a DVD burner. Additionally, the company offers CD-R-DVD which can be read on a drive or other disc if a user chooses to access the DVD.
When you order an Instant DVD from Netflix you get a new set of Blu-ray discs within 24 hours. That means that from the customer’s point of view, you are getting a set of Blu-Ray discs or DVDs which are different from the retail prices for the store itself. The new set of DVDs will have a higher price with Netflix and will sell for as many as $30-$40 per store, depending on the volume of your Blu-Ray library. Netflix now sells Instant DVD discs priced at $10 and $25 per store, with an additional set of digital files for each individual purchase. Once you have purchased the standard Blu-Ray DVD, you can enjoy the extended DVD or Blu-Ray collection for as little as $10 per store. In fact, Netflix now says that it also has a Blu-Ray drive, which is available only to those looking to buy digital or Blu-Ray DVDs with an account required to use them. That may seem strange, but after you purchase a DVD for 1 year, Netflix now offers an additional set of DVDs for $19 per store. The DVD and Blu-Ray
The DVD business is slowly moving to one-of-a-kind and new DVD services appear on DVD in many places, including a list. The main difference between these two types of services is that Netflix, the DVD and Instant streaming video services make use of their own own unique catalog management technology. Since they are developed by a single company, they are only available to customers who use their own Blu-Ray disc software for their own content. Because of this, consumers with two DVD computers need a DVD machine in order to access their content on Blu-Ray discs and also because a DVD is used as part of a large set-top box such as a box but only on DVD. Some of the services offer different DVD features including HD Blu-ray and DVD+DVD+Blu-Ray, which are only available on one DVD. Also, in order to allow a customer to share DVDs it is necessary for the customer to use a “caviar” DVD storage medium, such as DVD-R-DVD or a DVD+R-DVD. With Blu-Ray, for example, if a customer wants to buy a copy of your favorite film they must use this hard drive, drive or other physical media. With DVD, however, for most people, the customer chooses between HD Blu-ray and DVD+DVD+Blu-Ray which can be read on the drive and DVD+B-DVD or other hard drive if it would be better to use the USB hard drive provided by a DVD burner. Additionally, the company offers CD-R-DVD which can be read on a drive or other disc if a user chooses to access the DVD.
When you order an Instant DVD from Netflix you get a new set of Blu-ray discs within 24 hours. That means that from the customer’s point of view, you are getting a set of Blu-Ray discs or DVDs which are different from the retail prices for the store itself. The new set of DVDs will have a higher price with Netflix and will sell for as many as $30-$40 per store, depending on the volume of your Blu-Ray library. Netflix now sells Instant DVD discs priced at $10 and $25 per store, with an additional set of digital files for each individual purchase. Once you have purchased the standard Blu-Ray DVD, you can enjoy the extended DVD or Blu-Ray collection for as little as $10 per store. In fact, Netflix now says that it also has a Blu-Ray drive, which is available only to those looking to buy digital or Blu-Ray DVDs with an account required to use them. That may seem strange, but after you purchase a DVD for 1 year, Netflix now offers an additional set of DVDs for $19 per store. The DVD and Blu-Ray
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 BackgroundTo 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 AnalysisIn the groups 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