Formal Report

TABLE OF CONTENTS PAGE

TABLE OF CONTENTS 1
ABSTRACT 2
ANALYSIS METHODOLOGY 2
EXECUTIVE SUMMARY 2-3
COMPANY HISTORY 4-5
FIGURE 1.1: NETFLIX GROWTH PROGRESSION 4
THE FACE OF NETFLIX 5-6
IMAGE 1: MR. REED HASTINGS 5
IMAGE 2: MR. MARC RANDOLPH 6
FINANCIAL DATA 7
FIGURE 1.2: NETFLIX’S STOCK PROGRESSION 7
TABLE 1.1: DOMESTIC STREAMING 7
TABLE 1.2: INTERNATIONAL STREAMING 7
TABLE 1.3: DVD STREAMING 7
THE FUTURE OF NETFLIX 8
REFERENCES 9

1
Abstract
This report is an informative financial and historical analysis of Netflix, Inc. The facts and
figures presented in this report are for the Knights Investment Group (KIG). This information has
been gathered with the intent to determine whether Netflix is a smart, sensible, and stable
investment for KIG. This report encompasses information and data gathered from Netflix’s
website, their 2017 Annual Report and other reputable websites that focus on Netflix’s financial
data and company growth history. The goal of this informative report is to better assist the
Knights Investment Group in deciding whether Netflix harnesses the potential to be a sound
investment.
Netflix is an internationally recognized over the top media streaming service. Netflix allows its
customers to watch a variety of TV shows, movies, documentaries and more, on a surplus of
internet-connected devices. (“What is Netflix?” 2018) Ranked the 10th-largest internet company
by revenue, Netflix has taken its company potential to unfathomable heights since its founding in
1997. What started a mail order DVD rental service, Netflix has metamorphosed into a media
streaming giant. With over 109 million members sprawled out over 190 countries, it is safe to
say that Netflix has become an imminent threat to TV Cable providers everywhere.
Netflix released their Initial Public Offering (IPO) on the NASDAQ Stock Exchange in 2002. In
recent years, the company’s stock has since sky-rocketed as the team continues to revolutionize
the way they produce television and the way we watch it. As with any company, overcoming a
few bumps in the road, the creativity and unique impact Netflix is making on the film industry
has presented the company and its stockholders with tremendous returns. 20 years later, early
investors are thanking their lucky stars as the company has quadrupled their shareholders’
earnings. Even in the face of economic downturn, Netflix has instilled trust in their investors as
the company continues to strategically navigate the market’s fluctuations still coming out on top.

Analysis Methodology
The approach I used for this report involved research, data collection and analysis. I visited
Netflix.com to collect reputable information and background of the company. Being a Netflix
user allowed me to better understand and explain the company’s ideology as an insider. I read
and analyzed Netflix’s 2017 Annual Report where I collected revenue growth and contribution
patterns, profit margins, and other statically relevant information that I’ve included within my
report. Further, I analyzed my own experiences that I have had with Netflix and with other
internet entertainment streaming services I use. As a Netflix subscriber and stock owner, I
analyzed the significance in Netflix as a company. Not only for their unique contribution to the
media/film industry, but as company that can be deemed capable to survive the fluctuations of
the market while continuing to be a valuable and stable investment.

Executive Summary
Founded in 1997, Netflix first launched their DVD rental service in 1998. Over the last 20 years,
the company has transformed into the world’s largest internet streaming service. They have
revolutionized the way the world watches television. Netflix has reveled in the couch-potato

2
jargon that has followed their success. Such as “Netflix & Chill” and “Binge watching”, using the
slogans as marketing strategies and further developing their interface by adding options to their
app like, “skip-intro” or “Are you still watching?”

In 2010, Netflix took the next step in becoming an internationally recognized company by
expanding to Canada. Just two years later, Netflix expanded across several countries in Europe
and throughout Latin America and the Caribbean. In the Netflix Annual Report (2017), it’s stated
that Netflix is the pioneer in internet delivery of TV shows and movies with the launching of
their streaming service in 2007. Since the launch, Netflix has invented a new media arena for
internet-connected screens. Having changed the game by adding an enormous amount of content
that enables viewers to enjoy TV shows and movies directly on their internet-connected screens.
Resulting from their efforts, they have experienced large levels of consumer acceptance and
interest in what’s to come.

Netflix has three tangible mediums. Domestic streaming, International streaming, and Domestic
DVD. The Domestic streaming pulls revenue from monthly membership fees for services
consisting solely of streaming content to members in the United States. International streaming
pulls revenue from the same monthly services fees, but from members outside of the United
States. The Domestic DVD derives revenue from monthly membership fees for services
consisting solely of DVDs by mail.

With over 117 million streaming memberships in over 190 countries, Netflix offers over 140
million hours of TV shows, movies, original series, documentaries, and feature films to its
subscribers. Also stated in the Netflix Annual Report (2017), their main strategy is to continue to
grow their streaming membership globally through the expansion of content. With a focus on
programming a mixture of content that intrigues and captivates their members.

Netflix attempts to cater to different economic brackets by offering two different subscription
options:

1. The Basic: this subscription offers a single-stream non-HD plan for $7.99 per month.
2. The Standard Tier: this allows users to watch on two screens at once for $10.99 per
month.
3. The Premium Tier: this allows users to watch on up to four screens and offers access 4K
Ultra HD titles for $13.99 per month.

As of 2017, Netflix claimed a monument victory over the United States biggest cable provider.
Data presented in their 2017 Q2 Earnings Report (2017), showed that their streaming service
now has more subscribers (50.85 million) than the country’s largest cable provider (48.61
million). (“Netflix now has More U.S. Subscribers Than Cable TV”, 2017)

Gearing towards the future, Netflix has proved proof in their idea that internet entertainment is
replacing linear TV. The company claims that internet entertainment is expanding rapidly
because of the following:

3
  Ecosystem Growth: The internet continues to get fast and more reliable as the
advancement of technology continues.
 Freedom and Flexibility: Consumers have the ability to watch content, when they want,
where they want it, on any screen. The experience Netflix provides is personalized to
cater to individual wants.
 Rapid Innovation: Internet entertainment apps are constantly improving and revising their
content and interfaces.

As linear TV is left in a has-been limbo, the range it now uses on cable, fiber and over-the-air
will be reintegrated to expand internet data transmission. Netflix continues to put their faith in
the consumer as they preach their belief in the freedom of “on-demand” and “binge-watching”
with the flexibility of viewing content on any screen at any time. (“Investor Relations”, 2018)

Company History
What originally started as a DVD rental service has transformed into “The Next Big Thing” for
television watchers. Netflix was founded in 1997 in Scotts Valley, California by software
executive Reed Hastings and Silicon Valley tech mogul, Marc Randolph. Netflix has been right
on the coat-tails of each technological advancement we have seen since its creation in 1997. For
easier visual comprehension, I have created a charted timeline below that highlights the
company’s progression and change over the past 20 years. This timeline can be used as a point of
reference throughout the report. Paired with the company’s financial growth, it’s easy to see how
the different developments contributed to the company’s financial success.

Year Company Progression: 1997-2016

1997 Reed Hastings and Marc Randolph co-found Netflix.
1998 Netflix launches its first DVD rental sales site.
1999 Netflix debuts a subscription service, offering unlimited rentals for a low monthly price.
2000 Netflix introduces a personalized movie choice using user-ratings to predict better choices.
2002 Netflix makes its IPO under the ticker symbol, NFLX with 600,000 members.
2005 Netflix membership rises to 4.2 million.
2007 Netflix introduces streaming which allows members to instantly watch television shows on
their computers.
2008 Netflix partners with consumer electronics to introduce streaming on XBOX 360, Blu-ray,
and TV-top boxes.
2009 Netflix partners with consumer electronics to introduce streaming on the PS3 and internet-
connected TV’s.
2010  Netflix becomes available on the Apple iPod, iPad, and iPhone, along with, the
Nintendo and WII.
 Netflix launches in Canada, ay.
2011 Netflix launches in Latin America and the Caribbean.
2012  Netflix becomes available in Europe (The UK, Ireland, and Nordic countries)
 Netflix also wins the first “Prime Time” Emmy Engineering Award.
2013  Netflix launches in the Netherlands

4
  Netflix receives 31 Emmy Awards nominations.
 Netflix becomes the first internet streaming service to receive and win an Emmy
Award.
2014 Netflix launches in 6 new countries throughout Europe (Austria, Belgium, France,
Germany, Luxemburg, and Switzerland)
2015 Netflix launches in Australia, New Zealand, and Japan.
2016 Netflix is officially worldwide.
(Figure 1.1: Netflix Growth Progression information gathered from https://media.netflix.com/en/about-netflix)

What is now a “slew of award-winning original television series”, made available over 100
million hours of content, Netflix has said to have redefined what it means to watch TV. (“Meet
Reed Hastings”, 2015)

Meet the Founders: The Face of Netflix

Mr. Reed Hastings and Mr. Mark Randolph, two Silicon Valley Tech moguls, inspired to create
the “amazon.com of something.”, co-founded what we now know today as, Netflix. (“Meet Reed
Hastings”, 2015) Although Randolph left the company very early on, Netflix would not be what
it is, or, where it is today without each of their pivotal efforts, unique skill-sets, and
innovativeness to create the next big thing.

Reed Hastings
Reed Hastings attended Bowdoin College where he earned his
Bachelor’s He later went back to school, getting his Bachelor’s in
artificial intelligence from Stanford. He gives credit to the
university for turning him on to his entrepreneurial model. In
1991, Hastings founded Pure Software which developed a
debugging tool for engineers. Pure Software went public in 1995
and was later acquired by Rational Software. Hastings being the
CEO, earned $750 million from the acquisition. This newfound
fortune allowed Hastings to cofound Netflix with Randolph in
1997. Hastings claims the idea for Netflix originated after he was
asked to pay $40 in late fees for an overdue rental from Image 1: Getty Images
Blockbuster. It’s unclear whether this origination story is true or Mr. Reed Hastings- March 2018
not, Hastings has said to have changed his story a handful of
times. Ironically, Hastings originally offered to sell 49% of the
Netflix to Blockbuster in 2000 to act as an online portal for the
video-rental chain. Blockbuster rejected the offer. Fast-forwarding
five years, Netflix single-handedly led to the extinction of
Blockbuster with their 4.5 million subscribers. Netflix continued to grow exponentially as an
online marketplace, offering on-demand streaming services to its subscribers.

5
Marc Randolph
Marc Randolph graduated from Hamilton College with a
Bachelor’s in geology. Randolph, a “veteran Silicon Valley
entrepreneur”, advisor, and venture capitalist (“About Me,” 2018)
wanted to recreate the e-commerce model pioneered by Amazon.
Randolph named the company, designed its first user interface
and branding and acted as the chief executive for the first year
while Hastings attended Stanford University. Randolph stepped
down as CEO and turned to product development. He and another
founding member Mitch Lowe, begun testing a concept for a
movie rental kiosk called Netflix Express. With Hastings
rejecting the idea, Lowe went on to turn the idea into what we Image 2: Getty Images
know today as, Red Box. Randolph left Netflix in 2002 after
Mr. Marc Randolph- April 2017
helping Hastings navigate the company through its IPO stage. He
claims to have “preferred the start-up stage” and credits Hastings
with scaling the company to 190 million subscribers worldwide.
(“About Me,” 2018)

Financial Data
Netflix released its initial public offering (IPO) in 2003. At first, the company’s stock appeared
stagnant. In 2003, their stock closed at $3.91. In the following year, their stock closed at $1.76.
In both 2005 and 2006, the stock continued to stay below its 2003 closing value. Below I’ve
constructed a line chart showing the company’s stock progression since its IPO. As I mentioned

NFLX Stock Growth: 2002- 2018

$450.00 414.52
$400.00
$350.00
$300.00
$250.00
191.96
$200.00
$150.00 114.38 123.8
$100.00
52.6 48.8
$50.00 25.1
0 3.91 1.76 3.87 3.69 3.8 4.27 7.87 9.9 13.23
$0.00
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Figure 1.2: NFLX Stock Growth ("NFLX", 2018) Series 1

6
earlier in the report, the company progression is a good point of reference when paired with the
NFLX stock growth chart. Understanding how the company progressed in tandem with their
stock value allows us to better account for the yearly fluctuations.
Looking at Figure 1.2, Netflix has seen most of its stock growth in recent years, with the largest
jumps between 2012-2013 and 2016-2018. The company has also increased their yearly revenue
by more than $1,000,000.000 each year since the end of 2013. (“NFLX”, 2018)
Netflix’s revenue contribution and growth is broken down into their 3 mediums, Domestic
streaming, International streaming, and Domestic DVD.

Domestic Streaming

2017 2016 2015

MEMBERSHIPS: 54,750 49,431 44,738
REVENUES: $6,153,025 $5,077,307 $2,487,193
CONTRIBUTION 37% 36% 33%
MARGIN:
Table 1.1: (2017 Netflix Annual Report)

International Streaming

2017 2016 2015

MEMBERSHIPS: 62,832 44,365 30,024
REVENUES: $5,089,191 $3,211,095 $1,780,375
CONTRIBUTION 4% 10% 17%
MARGIN:
Table 1.2: (2017 Netflix Annual Report)

Domestic DVD

2017 2016 2015

MEMBERSHIPS: 3,383 4,114 4,904
REVENUES: $450,497 $542,267 $645,737
CONTRIBUTION 55% 52% 50%
MARGIN:
Table 1.3: (2017 Netflix Annual Report)

Shown in the tables above, Netflix has been generating almost double its revenue the last three
years. Interestingly, their original concept of an “online DVD rental service” seems to be losing
traction. As Netflix changes with the times, the company has veered further away from their
original blue-print. Now, with the advancement of technology, Netflix has turned its attention to
a new online internet ecosystem. The company has taken a plunge into producing its own
7
original content, while focusing on becoming the world’s largest internet streaming service. The
proof is in the numbers with yearly revenue for Domestic and International streaming almost
doubling between 2015 and 2016. As of 2017, Netflix had a price:earnings (P/E) ratio of ~210.
The company has been considered a “growth stock” by Forbes and yahoo finance for the past
three years. The majority of its valuation is based on expectations of continued high revenue
growth and high future profit. For Netflix to continue its upward earnings trend, they’ll have to
continue to push past their competition, and with their unique edge of producing Emmy Award
winning original content, it doesn’t seem to be a concern.
Along with producing original content, Netflix works to acquire licenses over various TV show
titles, movies, documentaries, etc. for extended periods of time. However, as the company has
shifts towards producing more original content, they have begun to cut down on acquiring as
much licensing. It’s to be noted that it’s more expensive for Netflix to produce their own content,
but at the same time, it’s proven to be far more lucrative. With the debut of the company’s first
original content “House of Cards” in 2013, their stock value nearly quadrupled from the prior
year’s closing value. Jumping from $13.23 in 2012 to $52.60 in 2013. In the past 5 years
Netflix’s stock has gone up +1,250.31%. Giving early investors a $380.45 return per share
owned. Represented in Figure 1.2, the trend of Netflix’s stock has continued to grow since its
IPO in 2003.

The Future of Netflix

With Netflix working and succeeding in becoming the world’s largest internet-streaming
entertainment service, the company’s future looks bright. with their belief in the extinction of
linear TV, and the promise to provide flexible, freedom-filled entertainment options, it sounds
futuristic. Netflix’s award winning original content and spot- on personalized recommendations
they seem to be making all the right moves. However, moving forward I see the company doing
away with their online DVD rental service. Figure 1.3 highlights its adverse effects on the
company’s growth potential. If Netflix continues at the same growth rate it’s bearded since 2013,
as an investor you’re looking at the company’s stock closing this year in the $500 range.
However, that growth potential could be dependent on a number of factors such as:
1. producing more popular, original content.
2. Exceeding 90 million subscribers in the United States alone.
3. Continuing to out-perform the competition, such as Hulu or Amazon.
4. Expanding into the Republic of China
The future of the company may not be dependent on each of these factors, but each factor could
contribute to a sliver of the company’s future success. These factors are predictions based off of
the direction Netflix is being taken in now.
In sum, Netflix continues to work hard towards growing their largest revenue base, finding new
and innovative ways to connect and communicate with their users, producing new original

8
 content and expanding to every corner of the world. Netflix is what sets them apart from the
other internet streaming services out there and habitually use it to their advantage.

References
About Me. (n.d.). Retrieved June 22, 2018, from http://marcrandolph.com/about-me/

Annual Reports & Proxies. (n.d.). Retrieved June 22, 2018, from https://ir.netflix.com/annualreports

Introducing: The Creators of Netflix. (n.d.). Retrieved from

https://www.gettyimages.com/photos/netflix

Investor Relations. (n.d.). Retrieved from https://ir.netflix.com/

Loudenback, T. (2015, September 06). Meet Reed Hastings, the man who built Netflix. Retrieved
June 22, 2018, from http://www.businessinsider.com/reed-hastings-netflix

Management Team. (n.d.). Retrieved June 22, 2018, from https://media.netflix.com/en/management-

team

Netflix Inc (NFLX.O) Company Profile. (n.d.). Retrieved June 22, 2018, from
https://www.reuters.com/finance/stocks/company-profile/NFLX.O

Netflix Now Has More U.S. Subscribers Than Cable TV. (n.d.). Retrieved from
http://fortune.com/2017/06/15/netflix-more-subscribers-than-cable/

Netflix: Most Innovative Company. (2000, January 01). Retrieved June 22, 2018, from
https://www.fastcompany.com/company/netflix

NFLX : Summary for Netflix, Inc. (2018, June 2). Retrieved June 22, 2018, from
https://finance.yahoo.com/quote/nflx/

What is Netflix? (n.d.). Retrieved June 22, 2018, from https://www.digitalunite.com/guides/tv-

video/what-netflix