ACC 345 Business Valuation Report Template (1)

Summary Business Valuation Report of Netflix, Inc.

Netflix, Inc. Report Date, 2022 < Contents TOC \O "1-3" \H \Z \U INTRODUCTION PAGEREF _TOC520208257 \H 3 HYPERLINK \l "_Toc520208258" Nature, Background, and History PAGEREF _Toc520208258 \h 4 Facilities PAGEREF _Toc520208259 \h 4 HYPERLINK \l "_Toc520208260" Customers PAGEREF _Toc520208260 \h 4 Management PAGEREF _Toc520208261 \h 4 HYPERLINK \l "_Toc520208262" Competition PAGEREF _Toc520208262 \h 4 Strengths and Weaknesses PAGEREF _Toc520208263 \h 4 HYPERLINK \l "_Toc520208264" Ownership PAGEREF _Toc520208264 \h 4 Major Shareholder Transactions PAGEREF _Toc520208265 \h 4 HYPERLINK \l "_Toc520208266" Business Risks PAGEREF _Toc520208266 \h 4 FINANCIAL ANALYSIS PAGEREF _TOC520208267 \H 5 HYPERLINK \ L "_T OC 520208268" F INANCIAL A NALYSIS O VERVIEW PAGEREF _T OC 520208268 \ H 5 B ALANCE S HEETS PAGEREF _T OC 520208269 \ H 5 HYPERLINK \l "_Toc520208270" Assets PAGEREF _Toc520208270 \h 5 Liabilities PAGEREF _Toc520208271 \h 5 HYPERLINK \l "_Toc520208272" Stockholder’s Equity PAGEREF _Toc520208272 \h 6 I NCOME S TATEMENTS PAGEREF _T OC 520208273 \ H 6 HYPERLINK \ L "_T OC 520208274" N ORMALIZATION A DJUSTMENTS PAGEREF _T OC 520208274 \ H 6 ECONOMIC OUTLOOK PAGEREF _TOC520208275 \H 7 HYPERLINK \ L "_T OC 520208276" I NDUSTRY A NALYSIS PAGEREF _T OC 520208276 \ H 7 Industry Overview PAGEREF _Toc520208277 \h 7 HYPERLINK \l "_Toc520208278" Competitive Landscape PAGEREF _Toc520208278 \h 7 Products, Operations and Technology PAGEREF _Toc520208279 \h 7 HYPERLINK \l "_Toc520208280" Sales and Marketing PAGEREF _Toc520208280 \h 7 Finance and Regulation PAGEREF _Toc520208281 \h 7 HYPERLINK \l "_Toc520208282" Regional and International Issues PAGEREF _Toc520208282 \h 7 Labor Trends PAGEREF _Toc520208283 \h 7 HYPERLINK \ L "_T OC 520208284" G ENERAL E CONOMIC A NALYSIS PAGEREF _T OC 520208284 \ H 7 Interest rates PAGEREF _Toc520208285 \h 7 HYPERLINK \l "_Toc520208286" GDP PAGEREF _Toc520208286 \h 7

INTRODUCTION Description of the Assignment The intended use for this is the sole purpose of sale of a minority stake for Netflix Inc.’s value. The objective for this summary is to provide Netflix’s financial statements to evaluate the businesses value and health. This summary analysis will be very informative when it comes to decisions that are being considered for redevelopment, improvements, or investments for operational performance. Standard of Value The value of Netflix’s business is a going concern and is not a liquidation or other premise. It is a fair market value as opposed to liquidation, fair value, investment value or some other standard. This valuation will provide a detailed description of Netflix Inc.’s prior revenue, tangible and intangible assets, expenses, liabilities, and Netflix’s employees who operate the company. Management and potential investors will be able to use this information to make future forecasts for Netflix Inc.’s profitability and investment opportunities. 4

Netflix, Inc. Brief History/Overview 0 Nature, Background, and History Netflix Inc. was founded in 1997 in Scotts Valley, California by Reed Hastings and Marc Randolph which started off as an online movie rental service. Their marketing strategy was unlimited rentals with no shipping and handling charges, due dates, and late fees which started to pull in new customers. By 2002, “Netflix goes public in May. The IPO raises $82.1 million and values Netflix at $309.7 million. Reed has 500,000 shares, and Marc has 166,000 shares. Netflix opens regional warehouses, bringing overnight delivery in response to subscriber complaints that it took too long to get their DVDs” (Kariuki, 2022). In 2006, Reed and Marc began making a profit from Netflix of $80 million and the subscribers rose to 6.3 million. In 2007, Netflix began streaming through their Watch Now service in Canada that allowed customers to watch the content on televisions, tablets, and computers. In 2010, they introduced Netflix to the United States and became a streaming business that offered DVDs by mail. In 2011, Netflix lost 800,000 subscribers due to them splitting their DVD rental company and streaming business into two different packages. In 2012, they started to make original shows and since then they won a lot of awards and the Squid Game and The Crown became extremely popular. In 2021, they provided streaming in 190 countries and had 209 million subscribers. China, Syria, North Korea, and Iran are notable exceptions. Mobile games were introduced on Netflix so that users could play games. Now in 2022, lost 200,000 subscribers in the first quarter which hasn’t happened in over 10 years (Kariuki, 2022). 1 Facilities Netflix Inc.’s facilities for their office locations are located in Los Angeles, California; Los Gatos, California; New York, New York; Salt Lake City, Utah; Washington, DC; Toronto, Canada; Amsterdam, Netherlands; Berlin, Germany; London, United Kingdom; Madrid, Spain; Paris, France; Rome, Italy; Istanbul, Turkey; Stockholm, Sweden; Copenhagen, Denmark; Warsaw, Poland, Alphaville, Brazil; Mexico City, Mexico; Buenos Aires, Argentina; Bogota, Colombia; Bangkok, Thailand; Hsinchu City, Taiwan; Jakarta, Indonesia; Manila, Philippines; Mumbai, India; Seoul, South Korea; Singapore, Singapore; Sydney, Australia; and Tokyo, Japan (Netflix, n.d.) Netflix’s corporate headquarters is located in Los Gatos, California (N.D., 2022). 2 Customers In quarter 3 of 2022, Netflix had approximately 223 million paid subscribers worldwide. The company had an increase of almost 2.5 million subscribers from quarter 2. Netflix Inc. has a total of 73 million global subscribers that are based in Canada and the United States (Stoll, 2022). The business has a majority of African Americans and Hispanics as their subscribers than they do Caucasians. The customers ages that use the service range from 18-54 years old (Stoll, 2022). 3 Management 4

Netflix’s competition is Disney Plus, HBO Max, Amazon Prime Video, CBS All Access, Hulu, Peacock, Apple TV+, YouTube TV, FuboTV, Sony Crackle, Showmax, and Curiosity Stream (Pereira, 2022). 5 Strengths and Weaknesses The businesses strengths are their brand, growth, customer base, content, adaptability, and price. Their weaknesses are copyrights, market over-dependence, costs, sustainability, and rigid pricing (Pereira, 2022). 6 Ownership Netflix is currently being owned by a majority of their institutional shareholders at 75.08%, Netflix’s insiders own 6.70%, and the retail investors own 18.22% (N.D., 2022). The institutional shareholders for Netflix are Capital Group at 9.1%, The Vanguard Group at 7.8%, BlackRock Inc. (BLK) at 6.3%, State Street Corporation (SSgA Funds Management) at 3.9%, and Fidelity Investments at 3.8% (Arrieche, 2022). 7 Major Shareholder Transactions The major shareholders among the businesses insiders are Leslie J. Kilgore at 35,196,000 shares, David A. Hyman at 31,610,000 shares and Gregory K. Peters at 13,090,000 shares (Arrieche, 2022). 8 Business Risks Netflix Inc.’s business risks involve strategy risk, competitive risk, supplier risk, regulation risk, and international risk. The strategy risk that the business has is that their content is more focused on providing original, interactive, and timely content. In 2019, the company spent more than 80% of 15.3 billion for original content production and it is increasing each year. Netflix changed their prices in 2017 and in 2019 which could affect the company by not as many members joining their services or existing customers cancelling their memberships. The business can be affected by new or existing competitors that could damage Netflix’s value by targeting its current existing market portion. “Netflix’s global expansion is also slowed by many local streaming service companies who are more easily accepted by local customers and more favored by local governments” (Yingxian, 2021). This could put the businesses future growth and development at a significant risk. The company relies on numerous partners to make its services available to consumers which these partners only stay for a year or two. “If Netflix can’t be successful in maintaining existing relationships and creating new ones with these partners, it might result in customer dissatisfaction and therefore adversely impact company value” (Yingxian, 2021). Netflix Inc. could be negatively impacted if the laws and regulations were to change concerning online services and the internet. There could be new fees or taxes due to the governments from other countries extending existing regulations to the companies services or by introducing new regulations. Netflix couldn’t completely expand globally or continue to grow their subscribers because many Asian countries have heavy restrictions when it comes to content. Netflix Inc. faces many risks with them expanding internationally. Netflix not only is dealing with the international governments restrictions but they are also facing the economic and intellectual challenges. The companies content doesn’t come in any other language except for English and it would cost them a lot of money to produce their content in another language to fit the local market. Another issue for the international market is the pricing. Most customers that are local don’t want to pay for limited library content and high subscription costs. The international customers would rather have local service providers. “Netflix needs to develop 4

different pricing strategies and systems for different markets according to the regional average income level” (Yingxian, 2021). 4

Stockholder’s Equity Income Statements Guidance : Similar to the balance sheet write-up, discuss major line items and drivers of those line items. For example, are there increases in Cost of Goods Sold? If so, what are the drivers of those costs? / Normalization Adjustments Guidance : Discuss any normalization adjustments you’ve made. Remember, normalization adjustments are changes to the incomes statement (or balance sheet) that smooth out or “normalize” any anomalies that the company may have experienced. An example would be expenses related to a corporate merger or restructuring. This helps you in your prospective analysis by not including any unusual expenses or income. PAGE 12

ECONOMIC OUTLOOK Industry Analysis Guidance : Research your industry by reviewing a select group of your company’s peers. By reviewing the annual report of 2-3 competitors you will get an understanding of these items below. You may also search the web for scholarly articles on your chosen industry or recent industry reports. Focus on the suggested items below: 9 Industry Overview 10 Competitive Landscape 11 Products, Operations and Technology 12 Sales and Marketing 13 Finance and Regulation 14 Regional and International Issues 15 Labor Trends General Economic Analysis Guidance : Research the primary economy in which your company operates. Use the U.S. as the default if it’s a global firm, but try to incorporate any important global factors if a majority of its operations is abroad. Focus on the factors suggested below: 16 Interest rates 17 GDP 18 International and Domestic Trade Policy 19 Monetary Policy 20 Fiscal Policy PAGE 12

25 Discount rate Guidance : Discuss the purpose of the discount rate in the valuation process. You do not have to explain each of these components, but note that they assign risk to different categories of the company. The risk-free rate is what a company would earn on a riskless government security. The equity risk premium is the risk above the risk-free rate one should expect on an equity security. The industry premium is the risk associated with a particular industry (i.e. manufacturing or retail). The specific company risk is a subjective amount applied by the valuation analyst based on his or her perception of the company’s risk. / PAGE 12

26 Valuation calculation Guidance : Discuss the mechanics of the calculation below. Provide your reasoning for the amounts chosen for the items in yellow (Depreciation, Capital expenditures, and Debt Reduction). / PAGE 12

FINAL CALCULATION OF VALUE Guidance : Summarize the table below and what it is telling the reader. / PAGE 12

SOURCES The following sources were used to derive the conclusions in this report and the ultimate calculation of value: 0 Current and historical financial statements were obtained for years ended: 1 Industry data from: 2 Economic data from: 3 Other sources: Anderson, D. (10 Nov., 2019). Netflix Inc.’s Organizational Structure & Its Strategic Implications. Rancord Society. Retrieved from HYPERLINK "https://www.rancord.org/netflix-organizational-structure-design-organizational-chart- characteristics" https://www.rancord.org/netflix-organizational-structure-design- organizational-chart-characteristics Arrieche, A. (29 Sept., 2022). Netflix shareholders: Who owns the most NFLX stock? Capital.com. Retrieved from HYPERLINK "https://capital.com/netflix-shareholder- who-owns-most-nflx-stock" https://capital.com/netflix-shareholder-who-owns-most-nflx- stock HYPERLINK "https://www.makeuseof.com/how-when-netflix-start-brief- company-history/" https://www.makeuseof.com/how-when-netflix-start-brief-company- history/ N.D. (2022). Netflix Headquarters and Office Locations. Craft. Retrieved from HYPERLINK "https://craft.co/netflix/locations" https://craft.co/netflix/locations Netflix. (n.d.). Locations Across the Globe. Netflix Jobs. Retrieved from HYPERLINK "https://jobs.netflix.com/locations" https://jobs.netflix.com/locations Pereira, D. (15 July, 2022). Netflix Business Model. The Business Model Analyst. Retrieved from HYPERLINK "https://businessmodelanalyst.com/netflix-business- model/#Netflixs_Key_Resources" https://businessmodelanalyst.com/netflix-business- model/#Netflixs_Key_Resources HYPERLINK "https://www.statista.com/statistics/250934/quarterly-number-of-netflix-streaming- subscribers-worldwide/" https://www.statista.com/statistics/250934/quarterly-number-of- netflix-streaming-subscribers-worldwide/ Yingxian, W. (2021). 5 Strategic Risks For Netflix: From Competition to Regulation. Journo. Retrieved from HYPERLINK "https://journo.com.tr/netflix-strategic-risks" https://journo.com.tr/netflix-strategic-risks 13