The most popular streaming company in the world was born on August 29, 1997 in Scotts Valley, California, United States. The legend begins when one of its founders, Reed Hastings, a master's in computer science from Stanford University, "came up with the idea of creating a company that sent DVDs to their homes, because he rented the movie Apollo 13 in a Blockbuster store and could not return it because it was lost ”(iProfesional, 2017).
After being fined $ 40, and in clear dissatisfaction with the service provided by the defunct Blockbuster, Hastings joined forces with Marc Randolph, veteran entrepreneur, shareholder and executive mentor of Sillicon Balley, and merged their companies Pure Software (created by Hastings) and Atria (created by Randolph), to revolutionize the market and create Kibble, a company that would later become NetFlix.com and finally only Netflix.
According to the following graph, provided by Statista and The Business Insider, we can see that for the year 2017 Netflix had 103.95 million subscribers worldwide, a figure that has grown enormously since 1999, when they only had 0.11 million subscribers.
Graphic “Netflix turns 20: Netflix subscribers 20 years after its foundation”
Much of Netflix's success is due to the fact that in 2007, 10 years after its founding, they changed their business model to distribute all their content exclusively online. To this brilliant movement we must add the fact that at the same time they began to bet on the creation and incorporation of original content into their streaming catalog, where series such as "House of Cards", "Sense8" and "Orange Is The New Black" They have earned Netflix billions of dollars, which has led the company to position itself as the # 61 most valuable brand in the world with an approximate value of 20.8 billion dollars (Global Top 100 Brands, 2018).
The following financial analysis will show Netflix's annual financial situation as of December 2018, with information collected from reliable financial sites (Investing.com and Reuters.com), this in order to dictate how viable it is to invest in the company today. today and what has been its growth compared to December 2017.
Netflix Balance Sheet
Table 1. Netflix Inc. Balance Sheet, as of December 2018 (in millions of dollars):
| Netflix Inc (NFLX) | |||
| BALANCE SHEET: Period Ending 12/31/2018 | |||
| Total Current Assets | $ 9,694.00 | ||
| Cash and Short Term Investments | $ 3,794.48 | ||
| Cash | $ 2,572.68 | ||
| Cash & Equivalents | $ 1,221.80 | ||
| Short Term Investments | - | ||
| Total Receivables, Net | $ 5,151.19 | ||
| Total Inventory | - | ||
| Prepaid Expenses | - | ||
| Other Current Assets, Total | $ 748.47 | ||
| Total NON Current Assets | $ 16,280.00 | ||
| Property / Plant / Equipment, Total - Net | $ 418.28 | ||
| Property / Plant / Equipment, Total - Gross | $ 786.80 | ||
| Accumulated Depreciation, Total | - $ 368.52 | ||
| Goodwill, Net | - | ||
| Intangibles, Net | $ 14,960.95 | ||
| Long Term Investments | - | ||
| Other Long Term Assets, Total | $ 901.03 | ||
| Total Assets | $ 25,974.00 | ||
| Total Current Liabilities | $ 6,487.00 | ||
| Accounts Payable | $ 5,249.00 | ||
| Accrued Expenses | $ 477.42 | ||
| Notes Payable / Short Term Debt | - | ||
| Current Port. of LT Debt / Capital Leases | - | ||
| Other Current liabilities, Total | $ 760.90 | ||
| Total NON Current Liabilities | $ 14,248.32 | ||
| Total Long Term Debt | $ 10,388.06 | ||
| Deferred Income Tax | - | ||
| Other Liabilities, Total | $ 3,860.26 | ||
| Total Liabilities | $ 20,736.00 | ||
| Total Equity | $ 5,238.77 | ||
| Common Stock, Total | $ 2,315.99 | ||
| Additional Paid-In Capital | - | ||
| Retained Earnings (Accumulated Deficit) | $ 2,942.36 | ||
| Treasury Stock - Common | - | ||
| Unrealized Gain (Loss) | - | ||
| Other Equity, Total | - $ 19.58 | ||
| Total Liabilites & Equity | $ 25,974.00 |
The Balance Sheet provides information on Netflix's assets, liabilities and capital. Regarding assets, we can see that intangible assets represent their best asset with 58% ($ 14,960.95) of total assets, second are accounts receivable with 20% ($ 5,151.19), followed by cash and short-term investments with 15% ($ 3,794.48), and fourth are its other long-term assets with 3% ($ 901.03) of the total value of the asset. This information means that Netflix's greatest value is found in all the content, both original and purchased by licenses, that it offers on its streaming platform (intangible assets).
Regarding the liability-capital ratio, we can see that the liability represents 80% and the capital 20%. Within these percentages, we find that long-term debt represents 40% ($ 10,388.06), followed by accounts receivable with 20% ($ 5,249.00), other liabilities with 15% ($ 3,860.26) and retained earnings. (accumulated deficit) with 11% ($ 2,942.36).
Netflix Income Statement
Table 2. Netflix Inc. Income Statement, as of December 2018 (in millions of dollars).
| Netflix Inc (NFLX) | Period Ending | salts = 100% | Period Ending | % of Change | |
| DEC-18 | % | DEC-17 | |||
| (+) | Revenues | $ 15,794.30 | 100% | $ 11,692.70 | 35.08% |
| (-) | Cost of Revenue | $ 9,967.54 | 63% | $ 7,659.67 | |
| (=) | Gross Profit | $ 5,826.80 | 37% | $ 4,033.04 | |
| (-) | Selling / General / Admin. Expenses | $ 2,999.76 | 19% | $ 2,141.59 | 40% |
| (-) | Research & Development | $ 1,221.81 | 8% | $ 1,052.78 | 16% |
| (-) | Other Operating Expenses, Total | $ - | 0% | $ - | |
| (-) | Depreciation / Amortization | $ - | 0% | $ - | |
| (=) | Operating Income | $ 1,605.23 | 10% | $ 838.67 | |
| (+/-) | Interest Income (Expense) | - $ 378.77 | -two% | - $ 353.36 | |
| (+/-) | Other, Net | $ - | 0% | $ - | |
| (=) | Net Income Before Taxes | $ 1,226.46 | 8% | $ 485.31 | |
| (-) | Provision for Income Taxes | $ 44.12 | 0% | - $ 152.71 | |
| (=) | Net Income After Taxes | $ 1,182.34 | 7% | $ 638.02 | 85.31% |
The income statement shows that there was an increase in sales of 35.08% compared to December 2017. Cost of sales represents 63% of total sales, so Netflix obtained a gross profit of 37% in 2018. Administrative, operating and depreciation / amortization must be discounted from this gross profit to obtain operating profit, which constitutes 10% of sales.
Likewise, this figure is subtracted from interest income expenses and tax provisions, which derives in net after-tax income that represented 7% of sales. With respect to December 2017, we can see that there was an increase of 85.31% in this figure, going from $ 638.02 to $ 1,182.34 million dollars.
Netflix Cash Flow
Table 3. Netflix Inc. Cash Flow, as of December 2018 (in millions of dollars).
| Netflix Inc (NFLX) | ||||
| CASH FLOW | Period Ending | Period Ending | % of Change | |
| dec-18 | dec-17 | |||
| Net Income / Starting Line | $ 1,211.24 | $ 558.93 | 117% | |
| to | Cash From Operating Activities | - $ 2,680.48 | - $ 1,785.95 | fifty% |
| b | Cash From Investing Activities | - $ 339.12 | $ 34.33 | -1088% |
| c | Cash From Financing Activities | $ 4,048.53 | $ 3,076.99 | 32% |
| d | Foreign Exchange Effects | - $ 39.68 | $ 29.85 | -233% |
| a + b + c + d | Net Change in Cash | $ 989.25 | $ 1,355.22 | -27% |
Cash flow is the variation of cash inflow and outflow, and is used to measure the liquidity of the company, that is, its ability to generate cash. As for Netflix, we can see that net income increased by 117% compared to December 2017, going from $ 558.93 to $ 1,211.24 million dollars.
However, both the cash from its operating activities (cash collected from income, payments to suppliers and employees, etc.), and the cash from its investment activities in long-term assets, went from 2017 to 2018 from - $ 1,785.95 to - $ 2,680.48 and $ 34.33 to - $ 339.12 million, respectively.
Finally, if we take into account the currency exchange effect, we observe that despite the fact that net income was higher in 2018, 2017 resulted in a better net change in cash with $ 1,355.22, which represented 27% of decrease for 2018 with $ 989.25 million dollars. This means that in 2018 Netflix decided to increase its investments in long-term assets and increased its payments to suppliers.
Netflix Financial Coefficients
Table 4. Financial coefficients of market value.
| VALUATION RATIOS | Company name:
Netflix Inc (NFLX) |
Sector:
Services |
| P / E Ratio: | 137.96 | 9.66 |
| Beta: | 1.39 | 1.11 |
| Price to Sales (TTM): | 9.99 | 123.63 |
| Price to Book (Most recent quarter): | 30.12 | 1.74 |
| Price to Tangible Book (MRQ): | 377.29 | 2.58 |
| Price to Cash Flow (TTM): | -58.87 | 12.46 |
The P / E ratio is 137.96, showing that there is a high expectation from investors to generate profits by investing in Netflix. As for beta (1.39), it allows us to know that there is great volatility when buying this stock, which is positive in upside markets such as Netflix, however, if there is a drop in it, the returns would be very low or practically null.
On the other hand, the coefficients Price to Sales (9.99) and Price to Book (30.12) indicate that the action is overvalued and that, with respect to the coefficient presented by the service sector (123.63), the value of the Netflix action could provide more returns. The Price to Tangible Book (377.29) and Price to Cash Flow (-58.87) coefficients show that, in the same way, the value of the share is overvalued with respect to the fixed assets that Netflix owns and its operating cash flow.
Table 5. Financial dividend coefficients.
| DIVIDENDS RATIOS | Company name:
Netflix Inc (NFLX) |
Sector:
Services |
| Dividend Yield | 0.00% | 2.90% |
| Payout Ratio (TTM): | 0.00% | 21.38% |
Netflix, being a relatively young company, has not yet paid dividends to its shareholders, so the Dividend Yield and Payout Ratio are at 0%, unlike those in the service sector, which stand at 2.90% and 21.38%, respectively.
Table 6. Financial coefficients of financial strength.
| FINANCIAL STRENGTH RATIOS | Company name:
Netflix Inc (NFLX) |
Sector:
Services |
| Quick Ratio (MRQ): | 1.49 | 1.87 |
| Current Ratio (MRQ): | 1.49 | 2.31 |
| LT Debt to Equity (MRQ): | 271.98% | 9.35% |
| Total Debt to Equity (MRQ): | 395.81% | 18.99% |
| Interest Coverage (TTM): | 4.24 | 7.94 |
In terms of financial strength, Netflix is at a disadvantage compared to the service sector. You have ample long-term debt and the leverage levels (LT Debt to Equity) are 271.98%, compared to the sector which is 9.35%, however, you can cover your interests in a positive way (Interest Coverage of 4.24) and It is also possible, although not like the competition in the sector, to cover its liabilities and short-term debt with relative ease (Quick Ratio and Current Ratio of 1.49).
Table 7. Financial profitability coefficients.
| PROFITABILITY RATIOS | Company name:
Netflix Inc (NFLX) |
Sector:
Services |
| Gross Margin (TTM): | 36.9% | 37.92% |
| EBITD Margin (TTM) | 10.2% | 23.17% |
| Operating Margin (TTM): | 10.2% | 14.17% |
| Net Profit Margin (TTM): | 7.7% | 11.67% |
| Effective Tax Rate (TTM): | 3.6% | 25.93% |
Netflix has a 36.9% gross margin after covering its costs and an operating profitability of 10.2%. As for taxes, you pay approximately 3.6% of your income and have 7.7% of profit after covering your costs. Compared to the service sector, it is slightly lower than other companies in the sector, however, it should be noted that it pays much less percentage of taxes.
Table 8. Financial efficiency coefficients.
| EFFICIENCY RATIOS | Company name:
Netflix Inc (NFLX) |
Sector:
Services |
| Revenue / Employee (TTM): | $ 2,224,594.93 | $ 7,403,860.00 |
| Net Income / Employee (TTM): | $ 170,597.18 | $ 688,928.00 |
| Receivable Turnover (TTM): | 3.34 | 7.01 |
| Receivable Turnover (days): | 107.83 | 51.36 |
| Inventory Turnover (TTM): | - | 19.06 |
| Inventory Turnover (days): | - | 18.89 |
| Asset Turnover (TTM): | 0.61 | 0.80 |
In terms of efficiency, the service sector performs better than Netflix in all coefficients except for inventory. We can see that the company has an income per employee of $ 2,224,594.93, being less than the $ 7,403,860.00 in the sector, it collects its debts on credit every 107.83 days, compared to the sector where they are collected every 51.36 days, but having no physical inventory does not need a rotation of the same (compared to the sector which is 18.89 days), so Netflix does not have to worry about having inventory stopped.
Table 9. Financial coefficients of administrative effectiveness.
| MANAGEMENT EFFECTIVENESS RATIOS: | Company name:
Netflix Inc (NFLX) |
Sector:
Services |
| Return on Assets (TTM): | 4.66% | 10.16% |
| Return on Investment (TTM): | 282.67% | 13.58% |
| Return on Equity (TTM): | 23.12% | 14.64% |
Regarding administrative effectiveness, Netflix presents better percentages with respect to the service sector. Despite the fact that its returns on assets are 4.66%, a percentage lower than those of the sector (10.16%), in return on investment it has 282.67% (sector of 13.58%), and in return of capital with 23.12% (sector of 14.64%), which shows that the returns generated by Netflix are mostly based on the capital invested by the shareholders and not so much on the assets of the company.
Financial analysis conclusion:
After analyzing Netflix's financial statements as of December 2018, as well as comparing the company's financial ratios with the service sector, I can conclude that Netflix is a solid and profitable company, which will continue to grow enormously as it has. in the last 10 years. While it still can't match many of the industry's financial ratios, specifically when it comes to streaming, Netflix is leading the way, both in numbers and in original content creation, to the industry giants it competes with today as Amazon Prime, Hulu and HBO Now.
The incorporation of films released on digital platforms to Oscar nominations, as recently happened with Alfonso Roma's “Roma”, exclusive to Netflix, is opening a totally different market than the conventional one, where the producers are betting more on the Launch of its online content, which will result in companies that have innovated in this sector growing at an even greater exponential speed, for which, undoubtedly, they would invest in Netflix shares.
References:
- Brandz (2018). Global Top 100 Brands. Last accessed on March 14, 2019, from: http://brandz.com/charting/54Coinc Blog (2018). Who is the Netflix competition in the world? Last accessed on March 14, 2019, from: https://www.coinc.es/blog/noticia/competencia-netflix-mundocom (2019). Netflix Inc (NFLX). Last accessed on March 14, 2019, from: https://www.investing.com/equities/netflix-inciPofesional (2017). The Netflix Story: How its founder built an empire after losing a movie from a video store. Last accessed on March 14, 2019, from: https: //www.iprofesional.com / notes / 255254-internet-software-netflix-technology-video-rental-movies-history-series-birth-The-history-of-Netflix-as-its-founder-armed-an-empire-after-losing- a-movie-of-a-video club (2019). Netflix Inc (NFLX). Last accessed March 14, 2019, from:
