Netflix, Inc., 2007

15 Pages Posted: 21 Feb 2020

See all articles by Phillip E. Pfeifer

Phillip E. Pfeifer

University of Virginia - Darden School of Business

Robert M. Conroy

University of Virginia - Darden School of Business

Abstract

The protagonist in this case is an analyst attempting to value Netflix, Inc., and check whether her recent buy recommendation at a price of $20.00 per share was still valid. Recent bad news had caused the price to drop and she needed to do her best to figure out what was the future for Netflix, and was it undervalued at $17 per share? Intended for MBA students, this case contains her discounted cash flow valuation and a set of assumptions (revenues per customer, retention rates, etc.) students can use to perform a valuation of the existing Netflix customer base as another approach toward judging the $17 stock price. There are two student spreadsheets available for this case (UVA-F-1592X1 and UVA-F-1592X2).

Excerpt

UVA-F-1592

Rev. Sept. 18, 2012

NETFLIX, Inc., 2007

The recent news in the home entertainment industry was not good, and Janet Gomez was concerned. The previous week, with Netflix trading at about $ 20.00 per share, she had issued a buy recommendation with a target price of $ 25.00 per share. But the day before—August 9, 2007—Netflix shares closed at only $ 17.16 per share. The shares had traded downward for the previous six months based on a series of bad reports in the news. The first quarter earnings results were lower than expected, there was a Web site outage that locked subscribers out of the system for almost 18 hours, Netflix had lowered subscription prices in the face of increased competition from Blockbuster, and the day before, Blockbuster had announced that it had reached an agreement to buy the digital movie download service Movielink. In light of these events, Gomez decided to reevaluate her current recommendation. What was the future for Netflix, and was it undervalued at $ 17.16 per share?

Home Entertainment Industry

The home entertainment business essentially started with the introduction of the VCR, a device that allowed people to view movies recorded onto VHS (video home system) tapes on their TVs. The device caught on quickly with American consumers. The percentage of U.S. households containing a VCR went from 2% in 1980 to 10% in 1983 to 66 % in 1988—and over 90% in the early 1990s. Accompanying this growth was the growth of video rental stores—small sole-proprietor establishments renting out VHS tapes for two or three days at a set price per rental. By the 1990s, however, the video rental market had consolidated and was dominated by a few large firms.

. . .

Keywords: Valuation, Customer Lifetime value (CLV), Discounted Cash Flow (DCF)

Suggested Citation

Pfeifer, Phillip E. and Conroy, Robert M., Netflix, Inc., 2007. Darden Case No. UVA-F-1592, Available at SSRN: https://ssrn.com/abstract=1585617

Phillip E. Pfeifer (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4803 (Phone)

HOME PAGE: http://www.darden.virginia.edu/faculty/Pfeifer.htm

Robert M. Conroy

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/faculty/conroy.htm

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
127
Abstract Views
1,205
rank
241,892
PlumX Metrics