Netflix -- Investing Bank.

Netflix -- investing bank

1. Intro & situation (strength and weakness) + Opportunity ppt 36

2. Financial statement analysis - ppt 16-28

3. Quantitative analysis - projected free cash flow- margins and growth rate

4. Strategy - strategy as an investment banker- how to finance - advantages of convertible bonds (hybrid finance)

5. Actions - when, amount, rate, callable, convertible restriction

Analysis based on Assumptions: 1. Growth rate 2. Margins 3. Projected 2-3 years earnings

Executive Summary

First, we analyzed the industry trend and the overall background of Netflix. By using SWOT analysis, we came to the conclusion that Netflix is a company with profit potential.

Then we analyzed the financial statements of the past 3 years and found out that Netflix has a large internal capital gap that needs external capital. We projected future 2-year earnings potential, which signaled us the operating income cannot cover future development of the firm. We also used earnings multiple and earning momentum evaluation methods to estimate the potential stock price of Netflix. We conducted the potential price increase for Netflix and recommended the stockholders to hold or buy the stock of Netflix. As an investment banker, we recommended Netflix to use hybrid financing to fix its capital gap.

Background:

Netflix is a media-streaming and video-rental company founded in 1997 by American entrepreneurs Reed Hastings and Marc Randolph. It was sparked by the frustrating experience Hasting has when he was fined $40 for late fees when returning the movie late. Corporate headquarters are in Los Gatos, California. In 1999 Netflix began offering an online subscription service through the Internet. In 2007 Netflix began to offering subscribers television shows and movies directly to their homes through the internet. In 2010 Netflix introduced a streaming-only plan that offered unlimited streaming service but no DVDs. Then, Netflix expanded beyond the US by offering the streaming-only plan all over the world after 2010. It's streaming service was available in more than 190 countries and territories up to 2016 (Netflix - William Hosch).

Situation:

Netflix is one of the most successful internet companies. It has 139 million paid memberships in over 190 countries TV series, films across a variety of genres and languages. Netflix’s success inspired many other companies to imitate.

Curiosity Stream offered free subscription-based service in 2015. The only difference between Netflix and Curiosity Stream is that Curiosity Stream has nonfiction in the genres of Science, Technology, civilization, and the human spirit. Hulu is a joint venture with The Walt Disney, 21st Century Fox, Comcast and Time Warner. Hence, it is able to update TV Shows and movies faster.

Although Netflix has many strong rivals, it is still growing. Intensive competition drives Netflix to continue to expand, which leads to an internal capital gap between operating and investing.

Strength:

Strongly focus on innovation on technology – In order to provide a better user experience, Netflix invested a lot on Network servers, internet connection with different server around the world. Since Netflix can be used on both mobile and desktop/laptop platforms, the company more focuses on the content, and how the content will be shown on each screen size.

Big brand name with strong brand associations – World's Leading Video Streaming Network with presence over 190 Countries

Weakness:

Cost of original content – Although its original content generates competitive power for the company, the cost continues to increase to keep updating this content. In 2017, it is expected for Netflix to invest $2.5bn solely on securing original content rights

Lack of rights to original content – Unlike many traditional television companies, Netflix does not own the copyright of its most content. Because of this, rights always expire after a year.

Opportunities:

Increasing using of the internet – Nowadays, people tend to use the internet to grab the information they need and to entertain themselves. Television, as a major and traditional entertainment mean of people, is also shifting most of the content to the internet. And Netflix, as a pioneer of this industry, would win a great opportunity under this trend.

The growth of technology – With the advanced technology of VR and 4K UHD, Netflix could offer their customers new ways to experience their products so that could improve their future competition.

Threats:

Increased competition – Hulu, HBO, and Youtube are all competing with Netflix.  For Netflix, it must keep generating more content with high quality to attract their audience and its competitors.

Digital piracy – There is a lot of this behavior exist in our life. This may affect not only Netflix but also a number of similar companies. This threatens the whole of Netflix's business model and ability to fund content in the future.

Although Netflix is affected by some weaknesses and threats, it’s still a potential and competitive company in this industry.

Financial Statement Analysis

From the income statement, we find that revenue increased 35% in the past. According to Netflix’s 10 K report,  revenue increased 24% in the domestic streaming and 53% in international streaming segments, respectively. Also, there is an increase in the operating margin that indicates higher operating efficiency. And the increase in net income was partly because of tax reduction which enacted in Dec 2017. (See table - Income statement)

From the statement of cash flow, we found that Netflix has negative operating cash used and negative investing cash used. Net cash used in operating activities increased $895 million from the year 2017 to 2018. This increase was primarily due to the increase in investments in streaming content which required more upfront payments. Increased payments associated with higher operating expenses was another reason, such as increased headcount to support continued improvements in streaming service, international expansion and increased content production activities. A decrease in proceeds from the sale of short-term investments and the acquisition of intangible assets contributed to negative investing cash flow. A high debt to asset ratio is not a good signal to investors, meaning the company lacked internal capital. And there was a positive cash flow coming from a large amount of debt financing activities. (See table - Statement of cash flow)