Netflix inc. valuation

Abstract

This Work Project is based on the application of the topics developed and discussed in the class of Financial Statement Analysis with professor Xhanti Gkougkousi. We decided to develop an in depth financial analysis of Netflix Inc. (mentioned as “Netflix Inc.”, “the company” or “it” in the paper) with the purpose to get a final investment strategy that entails whether to buy or sell the share. Netflix represents an interesting case of a new booming industry, which foresees a blurred future due to its rapid evolvement, the increasing competition and the high dependency from the licensed streaming contents, which represent the main Assets of the company (ca. 70% of Total Assets). The Work Project foreseen the reformulation of the Financial Statements of Netflix Inc. under specific rules and consequently the forecasts of its expected incomes for the next five years. Afterwards, two financial models have been applied (Comparable and Residual Income Model), with the aim to estimate the share price of Netflix Inc. as of 31/12/2015. The outputs of the valuation resulted in a share price of $65 with the multiple valuation analysis and a share price of $65 as well with the Residual Income Model. These results, perfectly aligned, entail that the stock price of Netflix Inc. was overvalued as it was trading at $114 at NASDAQ (as of 31/12/2015). Netflix is a particular company with a lot of peculiarities and the models applied are pretty standards entailing some limitations in the evaluation, although the analysis shows a clear result, that the share price was overvalued. The large gap between the results of the valuation and the traded price can be partly explained by the premium the market could be willing to pay for the stock, even if I believe it is still too large. Therefore, my final recommendation is to short the stock as it does not represent an attractive asset as being highly overvalued and really volatile.