Allison reilly | Millersville Univeristy '16



Managerial Finance 1Allison Reilly11/25/2014Financial AnalysisNetflix, Inc.“The world's leading internet subscription service for enjoying movies and TV shows”Abstract: This report encompasses a full analysis of Netflix, Inc. Included in the analysis is a brief introduction of the company, identification and overview of the industry that Netflix is classified in, a complete and in-depth financial analysis of the years 2009-2013, and the future plans for the company. In order to benchmark the financial standings of Netflix, an additional financial analysis of Netflix’s main competitor, , is also included. Introduction The purpose of this paper is to apply financial analysis techniques and methods to a real, publicly traded company. Gathering the financial statements and research related to the topic required knowledge on where to look for this information, and how to obtain it. This paper also provided an opportunity to gain in-depth understanding of a publicly traded company and to gain experience doing a complete financial analysis. The subject of this paper is Netflix, Inc. When they first became available their number one competitor was blockbuster. It didn’t take Netflix long to completely take over this type of industry. Some researchers and critics say it was when Netflix became available on digital devices such as IPhones and IPads in 2010. Today’s main competitor for Netflix is . Amazon became more of a competitor when they starting streaming movies and TV shows on their website. This analysis paper covers several areas of a complete analysis including a DuPont analysis, the five categories of ratio analysis, a comparison to , and an analysis of current and historical stock prices. The purpose in doing all of these analyses is to determine and look at the financial standing of Netflix, flix, flix is the world’s leading Internet television network with over 53 million members in nearly 50 countries enjoying more than two billion hours of TV shows and movies per month, including original series. In 1997 Reed Hastings and fellow software executive Marc Randolph co-found Netflix to offer online movie rentals. In 2000, Netflix made its initial public offering (IPO on Nasdaq under the ticker “NFLX” with 600,000 members in the US). Netflix’s audience continued to grow well into the millions. It became available on home computers and in 2010 Netflix became available on Apple IPad, IPhone and IPod touch. During that time we see a huge increase in stock price which I will describe in more detail later on. In 2010 they became more global by launching its service in Canada. The next couple years they expanded to places such as Latin America, the Caribbean, Europe including the United Kingdom, Ireland and in the Nordic Countries. Just this past year they expanded to places such as; Austria, Belgium, France, Germany, Luxembourg and Switzerland. Now Netflix reaches out to over 50 million members globally. Netflix has gone through multiple competitors. Originally their main competitor was Blockbuster but Netflix had the upper hand because they had easier access. Eventually Blockbuster was forced to shut down. According the official Netflix website, HBO is their primary long-term competitor as of right now. However since HBO is a private company I was unable to perform a cross-sectional analysis of these two companies. According to the Google Finance and Yahoo Finance, Amazon is the competitor for Netflix. In 2006 Amazon began providing “ready to watch” movies and TV shows. In 2012, Amazon signed a deal with pay-TV channel Epix?to feature movies on their streaming service, in a move to rival their competitor?Netflix. It should be noted that there were a couple of issues that have risen during this financial analysis. One of which is the fact that these two companies are not exactly similar. Netflix only offers entertainment where Amazon works as a retail company as well. Because of this Netflix, Inc. have zero inventories simply because they are not that kind of service. Throughout this analysis we must keep in mind that even though they are considered competitors they also have some differences. Explanation of Financial Analysis The data that was gathered for Netflix, Inc. includes the annual income statements and balance sheets for the years of 2009 through 2013, in addition to current and historical stock prices. A DuPont analysis, comparison of historical stock prices against a competitor, and financial ratio analysis were also completed. Annual income statements and balance sheets for the years 2009-2013 were also obtained for as well as their current and historical stock prices which were found on Yahoo finance. The analysis used for Amazon was a complete financial ratio analysis, also including the 5 categories of a ratio analysis: short term solvency ratios, long term solvency ratios, asset management ratios, profitability ratios, and market value ratios. Netflix, Inc. DuPont Analysis ROA affects ROE. Equity Multiplier affects ROA. Total asset turnover affects Equity multiplier and so on down the line. This understanding can help explain the decrease in ROE, ROA, Profit margin and Asset turnover from 2011 to 2012. A reason for this could be the dramatic decrease in Net Income when Total assets had not increased by much at all. From 2010 to 2011 the increase for Total Assets was 2,087.13 million dollars. From 2011 to 2012 the increase in total assets was only 898.69 million dollars. This normally would not strike me as off it were not for the huge increase just the year before. By doing some research I found that the reason net income decreased so much from 2011 to 2012 was because of the increase in depreciation, depletion and amortization along with not much if any change to sales. According to , in 2011 Netflix was split into two?businesses – DVD and streaming. These actions led to a price increase of 60% for anyone who decided to buy both Netflix products, and many customers chose to drop one.? Analysts predicted this to be the end of Netflix. However, this allowed Netflix to actually grow revenue, and grow profits, while making the market transition from one platform (DVD) to another (streaming.). Located in the Netflix Income statement you can see this shown by the increase in gross profit, operating profit and net income from 2012 to 2013. Netflix was turning itself around! This is also shown in the DuPont analysis with the ratios slowly increasing. Netflix, Inc. Historical Stock Prices Compared to Above shows a comparison of the historical stock prices of Netflix and the historical stock prices of Amazon throughout the years 2009-2013. According to this graph Amazon generally has always had higher stock prices. However at the end of 2010 and in the beginning of 2011 Netflix’s stock price rose to be higher than Amazon. This could be from many of reasons. For one, in 2010 Netflix became available on the Apple iPad, iPhone and iPod Touch, the Nintendo Wii, and other Internet connected devices making using their services that much easier. Also in 2010 Netflix had begun going global by launching its service in Canada.?There was also a dramatic drop at the end of 2011. This is most likely because Reed Hastings split the company into two businesses which caused the price to go up 60% for anyone who decided to purchase both Netflix Products. Most people thought that this would be the end of Netflix. Those people did not realize that Netflix had positioned itself to be a winner, and implemented the tactics to make that strategy work despite widespread skepticism. Their growth to tablets and smartphones was more than what made them jump in 2010. According to , the impact was far-reaching – affecting not only computer companies but television, content delivery and content creation. It was because of that move that helped them make such a turnaround in 2012. They have yet to surpass Amazon again but this could be due to the fact that Amazon stretches itself among more than one industry and in that case has the upper hand. Netflix, Inc Financial RatiosThe reason I chose to show the comparison of Current ratios is because it is used more often to evaluate liquidity than the cash ratio. The quick ratio would have been used however Netflix does not have any inventory. The graph above shows that Netflix is much more liquid than Amazon and to a creditor, the higher the current ratio the better. This could also indicate inefficient use of cash and other short-term assets. The graph also shows that Netflix has decreased in liquidity over the years 2009 through 2012 which a small increase in 2013. This could be because of the fairly large increase in current liabilities and prepaid expenses. 3941445396240Netflix, Inc4000020000Netflix, The figure above shows that overall Netflix is doing fairly well. They did have a pretty high Times interest earned ratio and this can be explained by their very low interest expense in 2009 of 6.475 million dollars. They also show a low times interest earned ratio in 2012 and this can be explained by them having a very low operating profit that year. 3451860281940Netflix, Inc.00Netflix, Inc. According to the data collected Amazon triumphs Netflix in all of the above ratios. Amazon has a stable asset turnover which is shown in the last 5 years. The asset turnover for Netflix shows a declining trend over the last 5 years. This actually makes sense when you consider all aspects. Amazon is also a retailer so they have inventory. Because they have inventory they need property and plants in order to store everything in warehouses. This is shown in the balance sheets. Amazon has a much higher Gross plant, property and equipment amount than Netflix has. Now considering these components the ratios above make sense. 4450080313691Netflix, Inc400000Netflix, Above shows the profitability ratios for Netflix, Inc. Overall they are not too impressive. As of 2013 Netflix was earning approx. 2.5 cents for every dollar in sales. It’s an improvement from 2012 but they still need to catch back up to where they were in 2009-2011. The low profit margin in 2012 can be traced back to their surprising low operating profit of only 49.992 million dollars compared to an operating profit of 385.068 million dollars in 2011. Lastly in the ratio analysis are the market value ratios.4404360473710Netflix, Inc00Netflix, Above shows a side by side comparison of each companies Asset management ratios. Considering Netflix does not have any inventories I expected their asset turnovers and NWC turnover to be higher than Amazons. As we’ve seen throughout this analysis, 2012 was a rough year for Netflix. This is again shown above with the earnings per share of 31 cents in 2012. Even though they have a low EPS they still managed to get an amazing price earnings ratio the same year. This is great for Netflix as it usually means that with a higher price earnings ratio the firm has significant prospects for future growth. It should also be noted that there are zeros for dividend payout ratio because Netflix did not distribute any dividends.Conclusion The results of ratio analysis show that Netflix, Inc. is not only able to cover their short-term and long term obligations, but they can also use their assets in an efficient manner, perform well when it comes to earnings on their sales, and they perform well in the market. Additionally, Netflix’s stock prices have been increasing over the past five years, along with Amazon. However, when compared to , one of Netflix’s competitors, the company ranks second in their financial standings and especially their operating efficiency. This is largely due to the fact that is not only involved in the entertainment industry but also retail. It should be noted that although is listed as the main competitor for Netflix, Netflix considers HBO and Hulu (two private companies) to be its main competitors in their entertainment industry. Bibliography"AMZN Profile | , Inc. Stock - Yahoo! Finance."?AMZN Profile | , Inc. Stock - Yahoo! Finance. N.p., n.d. Web. 23 Oct. 2014.Annual Balance Sheet (5years) for Netflix, Inc., and , [Data File], Standard and Poor’s. Retrieved September, 2014, from the COMPUSTAT (North America) database.Annual Income Statement (5 years) for Netflix, Inc., and , [Data File], Standard and Poor’s. Retrieved September, 2014, from the COMPUSTAT (North America) database.Hartung, Adam. "Netflix - The Turnaround Story of 2012!"?Forbes. Forbes Magazine, 29 Jan. 2013. Web. 23 Oct. 2014."Netflix."?Netflix. N.p., n.d. Web. 22 Oct. 2014. <;."NFLX Profile | Netflix, Inc. Stock - Yahoo! Finance."?NFLX Profile | Netflix, Inc. Stock - Yahoo! Finance. N.p., n.d. Web. 21 Oct. FLIX INC (NFLX)ANNUAL BALANCE SHEET(In Millions $$)20132012201120102009ASSETS Cash & Equivalents1,200.41748.078797.811350.387320.242 Prepaid Expenses059.92956.00762.21729.624 Other Current Assets1,858.361,432.78977.039228.36361.147------------------------------------------------------------------------------------------ Total Current Assets3,058.762,240.791,830.86640.967411.013 Gross Plant, Property & Equipment5,125.463,969.402,537.771,153.17971.42 less accumulated Depreciation2,900.792,331.711,354.48843.629730.957------------------------------------------------------------------------------------------ Net Plant, Property & Equipment2,224.681,637.691,183.29309.543240.463 Intangibles0001.5871.639 Deferred Charges08.38.35.485.966 Other Assets129.12481.1146.75224.4920.653------------------------------------------------------------------------------------------ Total long-term Assets2,353.801,727.101,238.34341.1268.72------------------------------------------------------------------------------------------ TOTAL ASSETS $ 5,412.56 $ 3,967.89 $ 3,069.20 $982.07 $679.73 20132012201120102009LIABILITIES Long Term Debt Due In One Year1.13.092.3192.0831.41 Accounts Payable1,884.421,453.32924.706222.82491.475 Accrued Expenses52.91850.04961.37436.48933.387 Other Current Liabilities215.767169.472236.656127.183100.097------------------------------------------------------------------------------------------ Total Current Liabilities2,154.201,675.931,225.06388.579226.369 Long Term Debt529.5412.016431.8234.123236.572 Other Liabilities1,395.301,135.28769.53169.20117.65------------------------------------------------------------------------------------------ TOTAL LIABILITIES $ 4,079.00 $ 3,223.22 $ 2,426.39 $691.90 $ 480.59 20132012201120102009EQUITY Common Stock0.060.0560.0550.0530.053 Capital Surplus777.441301.616219.11951.6220 Retained Earnings556.06443.001423.636238.489199.09------------------------------------------------------------------------------------------ Common Equity1,333.56744.673642.81290.164199.143------------------------------------------------------------------------------------------Stockholder's Equity - Parent1,333.56744.673642.81290.164199.143------------------------------------------------------------------------------------------ TOTAL STOCKHOLDER'S EQUITY $ 1,333.56 $ 744.67 $ 642.81 $ 290.16 $ 199.14 ------------------------------------------------------------------------------------------ TOTAL LIABILITIES & EQUITY5,412.563,967.893,069.20982.067679.734COMMON SHARES OUTSTANDING59.60755.58755.39952.78253.44STOCK PRICE$368.17 $92.59 $69.29 $175.70 $55.09 NETFLIX INCANNUAL INCOME STATEMENT ($ MILLIONS, EXCEPT PER SHARE)20132012201120102009Sales4,374.563,609.283,204.582,162.631,670.27Cost of Goods Sold841.576923.7831,200.281,018.66821.737------------------------------------------------------------------------------------------- Gross Profit3,532.992,685.502,004.301,143.97848.532 Selling, General, & Administrative Expense1,062.96933.424779.608527.723403.619-------------------------------------------------------------------------------------------Operating Income Before Deprec.2,470.031,752.081,224.69616.242444.913 Depreciation, Depletion, & Amortization2,241.681,702.08839.619338.695257.534-------------------------------------------------------------------------------------------Operating Profit228.34749.992385.068277.547187.379 Interest Expense29.14219.98620.02519.6296.475 Non-Operating Income/Expense-3.0020.4743.4799.77811.288 Special Items-25.1290-900-------------------------------------------------------------------------------------------Pretax Income171.07430.48359.522267.696192.192 Total Income Taxes58.67113.328133.396106.84376.332------------------------------------------------------------------------------------------- Income Before Extraordinary Items& Noncontrolling Interests112.40317.152226.126160.853115.86-------------------------------------------------------------------------------------------Income Before Extraordinary Items & Discontinued Operations112.40317.152226.126160.853115.86-------------------------------------------------------------------------------------------Available for Common112.40317.152226.126160.853115.86-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Adjusted Net Income $ 112.40 $ 17.15 $ 226.13 $ 160.85 $ 115.86 INCANNUAL BALANCE SHEET ($ MILLIONS)20132012201120102009ASSETS Cash & Equivalents12,447.0011,448.009,576.008,762.006,366.00 Net Receivables3,000.002,600.002,134.001,324.00836 Inventories7,411.006,031.004,992.003,202.002,171.00 Other Current Assets1,767.001,217.00788459424------------------------------------------------------------------------------------------ Total Current Assets24,625.0021,296.0017,490.0013,747.009,797.00 Gross Plant, Property & Equipment14,809.009,582.005,786.003,256.001,915.00 Accumulated Depreciation3,860.002,522.001,369.00842625------------------------------------------------------------------------------------------ Net Plant, Property & Equipment10,949.007,060.004,417.002,414.001,290.00 Investments at Equity12714026627991 Other Investments00003 Intangibles3,300.003,277.002,602.001,912.001,801.00 Other Assets1,158.00782503445831------------------------------------------------------------------------------------------ Total Long-term Assets15,534.0011,259.007,788.005,050.004,016.00------------------------------------------------------------------------------------------ TOTAL ASSETS $ 40,159.00 $ 32,555.00 $ 25,278.00 $ 18,797.00 $ 13,813.00 20132012201120102009LIABILITIES Long Term Debt Due In One Year1,736.001,134.00524224141 Accounts Payable15,133.0013,318.0011,145.008,051.005,605.00 Other Current Liabilities6,111.004,550.003,227.002,097.001,618.00------------------------------------------------------------------------------------------ Total Current Liabilities22,980.0019,002.0014,896.0010,372.007,364.00 Long Term Debt5,181.003,830.001,415.00641252 Deferred Taxes5710000 Other Liabilities1,681.001,531.001,210.00920940------------------------------------------------------------------------------------------ TOTAL LIABILITIES $ 30,413.00 $ 24,363.00 $ 17,521.00 $ 11,933.00 $ 8,556.00 EQUITY Common Stock55555 Capital Surplus9,573.008,347.006,990.006,325.005,736.00 Retained Earnings2,005.001,677.001,639.001,134.00116 Less: Treasury Stock1,837.001,837.00877600600------------------------------------------------------------------------------------------ Common Equity9,746.008,192.007,757.006,864.005,257.00------------------------------------------------------------------------------------------Stockholder's Equity - Parent9,746.008,192.007,757.006,864.005,257.00------------------------------------------------------------------------------------------ TOTAL STOCKHOLDER'S EQUITY $ 9,746.00 $ 8,192.00 $ 7,757.00 $ 6,864.00 $ 5,257.00 ------------------------------------------------------------------------------------------ TOTAL LIABILITIES & EQUITY $ 40,159.00 $ 32,555.00 $ 25,278.00 $ 18,797.00 $ 13,813.00 COMMON SHARES OUTSTANDING459454455451444PRICE PER SHARE $ 398.79 $ 250.87 $ 173.10 $ 180.00 $ 134.52 INCANNUAL INCOME STATEMENT ($ MILLIONS, EXCEPT PER SHARE)20132012201120102009Sales74,452.0061,093.0048,077.0034,204.0024,509.00Cost of Goods Sold51,681.0044,271.0036,288.0026,009.0018,594.00------------------------------------------------------------------------------------------- Gross Profit22,771.0016,822.0011,789.008,195.005,915.00 Selling, General, & Administrative Expense19,412.0014,287.009,773.006,131.004,300.00-------------------------------------------------------------------------------------------Operating Income Before Deprec.3,359.002,535.002,016.002,064.001,615.00 Depreciation, Depletion, & Amortization2,668.001,863.001,149.00657432-------------------------------------------------------------------------------------------Operating Profit6916728671,407.001,183.00 Interest Expense14192653934 Non-Operating Income/Expense-115-19112013657 Special Items0000-51-------------------------------------------------------------------------------------------Pretax Income4353899221,504.001,155.00 Total Income Taxes161428291352253------------------------------------------------------------------------------------------- Income Before Extraordinary Items& Noncontrolling Interests274-396311,152.00902-------------------------------------------------------------------------------------------Income Before Extraordinary Items & Discontinued Operations274-396311,152.00902-------------------------------------------------------------------------------------------Available for Common274-396311,152.00902-------------------------------------------------------------------------------------------Adjusted Available for Common274-396311,152.00902------------------------------------------------------------------------------------------- Adjusted Net Income274-396311,152.00902NETFLIX INCNetflix Ratios:20132012201120102009I. Short Term Solvency RatiosCurrent Ratio (x)1.421.3371.4951.651.816Quick Ratio (x)1.421.3371.4951.651.816Cash Ratio (x)0.5570.4460.6510.9021.415Net Working Capital to Total Assets16.71%14.24%19.74%25.67%27.16%II. Long Term Solvency RatiosTotal Debt Ratio (x)0.9750.8120.7910.7050.707Debt Equity Ratio (x)3.0594.3283.7752.3852.413Equity Multiplier (x)4.0595.3284.7753.3853.413Long Term Debt Ratio (x)0.2840.3560.4020.4470.543Times Interest Earned Ratio (x)7.8362.50119.22914.1428.939III. Asset Management RatiosInventory Turnover (x) N/A N/A N/A N/A N/ADays' Sales in Inventory (days) N/A N/A N/A N/A N/AReceivable Turnover (x) N/A N/A N/A N/A N/ADays' Sales in Receivable (days) N/A N/A N/A N/A N/ANWC Turnover (x)4.8366.395.298.5699.046Fixed Asset Turnover (x).8535.90931.2631.8751.719Total Asset Turnover (x)0.8080.911.0442.2022.457IV. Profitability RatiosProfit Margin2.57%0.48%7.06%7.44%6.94%Operating Margin5.22%1.38%12.02%12.83%11.22%Gross Margin80.76%74.41%62.54%52.90%50.80%Return on Assets2.08%0.43%7.37%16.38%17.05%Return on Equity8.43%2.33%35.19%55.46%58.20%V. Market Value RatiosEarnings Per Share$1.89 $0.31 $4.08 $3.05 $2.17 Dividend Payout Ratio00000Price Earnings Ratio (x)195.212300.61716.97957.66325.411Market-to-Book Ratio16.4566.9125.97231.96114. INCRatios:20132012201120102009I. Short Term Solvency RatiosCurrent Ratio (x)1.0721.1211.1741.3251.33Quick Ratio (x)0.7490.8030.8391.0171.036Cash Ratio (x)0.5420.6020.6430.8450.864Net Working Capital to Total Assets4.10%7.00%10.30%18.00%17.60%II. Long Term Solvency RatiosTotal Debt Ratio (x)0.7570.7010.6930.6350.619Debt Equity Ratio (x)3.1212.9742.2591.7381.628Equity Multiplier (x)4.1213.9743.2592.7382.628Long Term Debt Ratio (x)0.3470.3190.1540.0850.046Times Interest Earned Ratio (x) 4.901 7.304 13.338 36.078 34.794III. Asset Management RatiosInventory Turnover (X)6.9747.3417.2698.1238.565Days' Sales in Inventory (days)52.33749.72150.21344.93442.615Receivable Turnover (x)24.81723.49722.52925.83429.317Days' Sales in Receivable (days)14.70815.53416.20114.12912.450NWC Turnover (x)45.2626.63218.53410.12510.074Fixed Asset Turnover (x)5.0276.3768.30910.5012.798Total Asset Turnover (x)1.8541.8771.9021.821.77IV. Profitability RatiosProfit Margin0.37%-0.06%1.31%3.37%3.68%Operating Margin0.93%3.19%1.80%4.11%4.83%Gross Margin30.58%27.54%24.52%23.96%24.14%Return on Assets0.68%-0.12%2.49%6.13%6.53%Return on Equity2.81%-0.48%8.12%16.79%17.12%V. Market Value RatiosEarnings Per Share $ 0.60 $ (0.09) $ 1.39 $ 2.55 $ 2.03 Dividend Payout Ratio00000Price Earnings Ratio667.99-2917.09124.80270.47866.201Market-to-Book Ratio18.78213.90310.15311.82711.361 ................
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