Valuation of Netflix, Inc

13 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

Intended for MBAs, this case concerns the valuation of Netflix, Inc., which was the largest U.S. online movie rental subscription service in early 2009. After reviewing Netflix's historical financial and customer relationship performance, this case presents three approaches for valuing the firm in early 2009. The first is a company-level discounted cash flow analysis based on pro forma projections of revenues, earnings, and cash flow. The second approach attempts to judge whether Netflix's prevailing market value was reasonable by comparing selected company ratios with those of comparable companies. The final approach is based on the assumption that Netflix's enterprise value (EV) was the sum of its current and future subscribers' values (discounted present values, to be exact). There is also a spreadsheet available for students (UVA-F-1610X).

Excerpt

UVA-F-1610

Rev. Oct. 4, 2013

Valuation of Netflix, Inc.

This case concerns the valuation of Netflix, Inc., which was the largest online movie rental subscription service in the United States in early 2009. Netflix achieved 2008 revenues of $ 1.364 billion by providing approximately 10 million subscribers with access to over 100,000 DVD and Blu-ray titles by mail and over 12,000 streaming content choices. Netflix offered nine different subscription plans, starting at less than $ 5 per month. The most popular plan included unlimited rentals and up to three DVDs out at a time for $ 16.99 a month. A national network of more than 50 high-tech distribution centers were strategically located around the country within driving distance of 119 U.S. Postal Service process and distribution facilities, allowing the firm to provide two-day service to 97% of its customers.

Other distinguishing features of Netflix's services were the customer queue and the Cinematch recommendation system. Customers could go online at any time and add, delete, or rearrange titles in their queues—lists of titles that customers instructed Netflix to mail them upon return of each DVD. Once a customer was finished with one DVD, he or she simply dropped it in the mail in a postage-paid, return-mail envelope and waited for the next title in his or her queue to appear in the mailbox. To help customers identify titles that might interest them, Netflix asked customers to rate each title sent to them along with any other titles available to Netflix that they may have previously viewed. Those ratings were compared with other customers' ratings using a technique called collaborative filtering. The recommendation engine then offered a list of titles that were similarly rated by other customers in the database.

. . .

Keywords: cash flow, enterprise value, spreadsheet

Suggested Citation

Pfeifer, Phillip E. and Conroy, Robert M., Valuation of Netflix, Inc. Darden Case No. UVA-F-1610. Available at SSRN: https://ssrn.com/abstract=1585618

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

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