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UNITED STATES

NFLX US

Underperform
Price (at 20:00, 12 Sep 2016 GMT)
US$99.05
Valuation

US$

87.19

- DCF (WACC 12.3%, beta 1.5, ERP 7.5%, RFR 1.7%, TGR 5.0%)

12-month target
US$
85.00
Upside/Downside
%
-14.2
12-month TSR
%
-14.2
GICS sector
Retailing
Market cap
US$m
42,465
30-day avg turnover
US$m
618.9
Number shares on issue
m
428.7

Revenue
EBITDA
Adjusted profit
EPS adj
EPS adj growth
PER adj
Total DPS
Total div yield
EV/EBITDA

2015A 2016E 2017E 2018E


m
m
m
US$
%
x
US$
%
x

6,780
228
123
0.28
-46.8
352.4
0.00
0.0
194.8

Crouching tiger, hidden challenges


Event
We are downgrading NFLX shares from Neutral to Underperform. We believe

Netflix will succeed over time in its global expansion but the near-term may not be
easy, with high content costs, increasing competition from Amazon in the US, and
competitive markets in many countries that Netflix has launched into this year.
Our views are shaped by contributions from Macquarie global TMT analysts that
contributed to our accompanying report out today, Global SVOD Netflix,
Amazon & the rise of the locals.

Impact

Investment fundamentals
Year end 31 Dec

Netflix

8,735 10,611 12,186


80
526
897
88
323
592
0.20
0.74
1.35
-28.7 267.2
83.5
494.1 134.6
73.3
0.00
0.00
0.00
0.0
0.0
0.0
555.1
84.4
49.5

NFLX US vs S&P 500, & rec history

International expansion isnt easy. Many countries Netflix is expanding into

have been growing pay TV markets with incumbent operators that have invested
in VOD/SVOD offerings, often as add-ons to existing subscriptions. In addition,
numerous SVOD services have gotten off the ground, often at cheaper prices and
offering more local content. Many of Macquaries global TMT analysts are
sceptical of Netflixs initial launch efforts, citing price and lack of compelling
content as risks. We have factored these views into our international subscriber
model, where we estimate below-consensus 73m subs by 2019. We believe
success will require partnering with local content providers and/or investing in
more local content, or in content that will travel. This will be expensive indeed,
Netflixs total content obligations have ballooned to $16-18bn including unknown
off-balance sheet commitments, and could well rise further. We have developed a
model that weve accurately employed before to forecast Netflixs 3-year P&L
content costs, which we work into our assumptions, leading us to cut EPS
estimates in 2017, 2018 and 2019.
US growth could also be tougher in the near term, with more competition from

Note: Recommendation timeline - if not a continuous line, then there was no


Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Capital (USA), September


2016
(all figures in USD unless noted)

Amazon, which is doubling its content spending this year, and a plethora of OTT
options coming to market, from HBO Now to skinny bundles to virtual MVPDs like
Hulu Plus. These will all compete for producers content and consumers time.
Longer term however we think SVOD is rising inexorably and theres little

doubt Netflix will do well, with deep pockets, top-notch data to inform on
viewership, and a pricing lever, having now raised ASP and delivered good
revenue improvement up 28% in Q2.

Earnings and target price revision


We are reducing 2017E EPS from $0.85 to $0.74.

Price catalyst
12-month price target: US$85.00 based on a DCF methodology.
Catalyst: Programming or subscriber updates, Q3 results in Oct.

Analyst(s)
Tim Nollen
+1 212 231 0635

tim.nollen@macquarie.com

13 September 2016

Macquarie Capital (USA) Inc.

Action and recommendation


Downgrade to Underperform. We expect investors will remain focused on raw

sub numbers, which could disappoint near-term from both international sub adds
and price elasticity on demand in the US. These effects could increasingly stand
out in light of the high content costs.

Please refer to page 14 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.

Macquarie (USA) Research

Netflix

Analysis
Netflixs international expansion has gotten off to a slow start, due to market dynamics in several
countries. Despite the big splash global roll out announced in January, this is more of a slow build in
many countries, as Netflix approaches each market separately and learns as it goes. The question is if
this will remain a slow build up as it was initially in Lat Am before taking off, and if so when, or if some
markets simply wont be good for Netflix.
Macquarie TMT analysts from around the world weighed in, in our industry report, with an overall
cautious view on Netflixs likelihood of success.
It may be a fools game to try this, but in the following pages we assess how Netflix international subs
and content costs will evolve on a 3 year view. Based off of our methodology, we estimate 73m
international subs and $9.1bn in P&L content costs in 2019. This compares with our previous estimates
of 91m subs and a similar $9.3bn content costs implying lower earnings estimates ahead. We therefore
cut EPS estimates in 2017,2018, and 2019.

Fig 1 Netflix subscriber estimates and penetration rates


Millions of Subs
6.0

45%

5.3

5.2

40%

5.0
35%
4.0

30%
25%

3.0
20%
2.0
2.0

15%
10%

0.9

1.0

0.5

0.0

5%
0%

UK

Canada

Subscriber Numbers

Australia

France

Japan

Netflix Household Penetration %

Source: SNL Kagan 2016, Macquarie Research, September 2016

Estimating international sub growth


We believe the methodology is important and we use a methodology that we think both quantitatively and
qualitatively assesses the international expansion potential, and that has proven to work before on
content cost estimates.

In 2013 we estimated Netflixs total 2015 content costs would rise 59% to $2,483m we were
off by $4m
In the past weve attempted to quantify the subscriber numbers required for Netflix to achieve consensus
earnings expectations 3 years out (see most notably Near-term momentum unlikely to be "Arrested" but
content cost risks rise, 17 May 2013). Our math has worked:
In 2013 we estimated based on Netflixs total contractual obligations, both on and off balance sheet,

that Netflix would record $2,483m in 2015 US content cost of revenues, up from $1,559m in 2012.
They reported $2,487m.

13 September 2016

Macquarie (USA) Research

Netflix

We also estimated based on our calculation of Netflixs total content cost that Netflix would need to hit

43m US subscribers in 2015 to meet domestic earnings expectations. We didnt think Netflix could
add this many subs, but it did, closing the year at 44.7m.
But US sub growth is now slowing due in part to the law of large numbers and in part to some
elasticity of demand with the ungrandfathering of price increases this summer. While investors have
stressed over this, we pointed in our Q2 earnings note Pricing grows but volume slows, 18 July 2016 to
the rising value of Netflixs revenue growth, with ASP up 4.5% and ARPU up 5.7%, leading to a revenue
and earnings beat vs guidance and consensus. This should provide a shield to earnings, but we think
investors will remain focused on the raw sub numbers for now.

Fig 2 Boost in ARPU offers short term domestic revenue growth relief
ARPU ($USD)
28.0

27.6

25.0%

27.2

27.0

20.0%

26.0
25.0
24.0

24.3

24.7

24.6

25.6

24.7

15.0%

23.8
10.0%

23.0
5.0%

22.0
21.0

0.0%
1Q15
Arpu

2Q15

3Q15

4Q15

1Q16

US Sub Growth YoY

2Q16

3Q16

4Q16

Domestic Streaming Rev. Growth YoY

Source: Macquarie Research, September 2016

So international subscriber growth is the next frontier. Data on Netflix subs by country remains very
sparse, with certain third party services only offering estimates on large foreign markets and at year end.
While SNL Kagan estimates summarized in the table below offer some color as to subscriber numbers
through 2015, they dont address Netflixs progress since it embarked on its full-scale global rollout.
Macquarie TMT analysts provide some general estimates in our industry report for some of these
countries.

Fig 3 2015 international Netflix subscriber estimates


Europe
UK
Netherlands
Sweden
France
Denmark
Germany
Norway
Finaland
Belgium
Ireland
Austria
Other

Subscribers (m)
5.26
1.44
1.08
0.93
0.89
0.87
0.68
0.63
0.37
0.34
0.23
0.66

Other
Brazil
Mexico
Argentina
Colombia
Chile
Other
Australia
Canada

Subscribers (m)
3.18
2.14
0.85
0.83
0.40
0.78
1.30
5.20

Source: SNL Kagan 2015, Macquarie Research, September 2016

To obtain an estimate for these newer international markets we use our own methodology of an index of
estimated Netflix sub penetration driven off of broadband penetration numbers. By using SNL Kagan
data on broadband household and occupied household numbers, we are able to produce a scale of
broadband penetration per country from which we derive our estimates for broadband penetration in
various markets. We then identify proxy countries to use for both the high and low ends of the index.
13 September 2016

Macquarie (USA) Research

Netflix

Fig 4 International Netflix subscriber Index


Broadband penetration

Paid sub penetration

34.0
41.3
48.6
55.9
63.1
70.4
77.7
85.0
90.0
95.0
100.0

14%
15%
16%
18%
19%
20%
22%
23%
24%
25%
27%

Latin America

UK

Source: SNL Kagan 2015, Macquarie Research, September 2016

As both the UK and Latin America have stated data for broadband households, broadband penetration,
and Netflix subs, we use these as our endpoints, filling in a scaled index to use for the rest of the
countries. We then use this index to estimate Netflix subscribers for the various countries that we do not
have previous estimates for. Summing all of our estimates up, we obtain the following results for Netflix
paid subs by 2019.

Fig 5

Netflix international subscriber opportunity to 2019E

Country

Initial Netflix launch

Canada
Latin America
Early Europe markets
New Europe markets
Australia
Asia
Middle East & Africa
Total

September 2010
September 2011
January 2012
October 2015
March 2015
Fall 2015
2016

Broadband
Occupied
households (m) households (m)
12.8
79.8
114.6
94.9
7.9
147.4
31.7
489.1

14.9
190.5
142.1
200.9
8.9
654.2
299.8
1,511.4

Broadband
penetration
86%
42%
81%
47%
88%
23%
11%
32%

Estimated paid Estimated paid Estimated total


sub penetration
subs (m)
subs (m)*
50%
14%
22%
19%
24%
15%
3%
17%

6.4
11.2
25.2
17.7
1.3
21.9
0.8
85.1

6.7
11.6
26.2
18.4
1.5
22.8
0.8
88.4

Source: Macquarie Research, September 2016

Looking more carefully at the inputs though, 85m paid subs seems high to us. For ex., our model
estimates Japan will have 9.2m Netflix subs in 2019 compared with an estimated 0.5m now. Likewise,
Korea is forecast to have 5.6m subs, but Macquarie analysts there believe the pay TV operators
strength, and Netflixs relative weakness, will make meaningful sub growth difficult. Likewise our model
says Russia will have 5.7m Netflix subs in 2019 again this seems high to us given the economic
situation there.
We had previously used this methodology a year ago in a note that accompanied our first Global OTT
report. When comparing the two notes, we see a difference in our 2018 international sub estimate (then,
as now, a three year forward view). As entrance to China now looks less likely, we remove this from our
assumption completely.
We do note Netflixs early slow start in Latin America has since ramped up, with sub adds now standing
at over 8m.

13 September 2016

Macquarie (USA) Research

Netflix

Estimating international content costs to 2019


We believe Netflixs success in many markets will depend on acquiring and creating local content, and/or
acquiring and creating content in genres that translate and scale well globally. Netflixs user data is an
important input to this. As stated earlier, the service currently has ~600 hours of original programming,
an increasing amount of which is foreign originals, and Netflix aims to reach a 50/50 mix over time of
licensed and original content. Examples include the Indian comedy Brahman Naman, and French drama
Marseille, and some of these can be cheaper to make than a Hollywood TV production (e.g. The Get
Down or Stranger Things).
To get a better understanding of what Netflix content cost and subsequent cost of revenues
might look like in the future, we first have to establish what their streaming bases, both domestic
and international, look like currently. To do so, we start with the companys 2015 stated amortization
expense for both segments, shown below.

Fig 6 Netflix content amortization expense (amortization base)


Content Amortization Expense ($m)
Domestic Content Amortization
International Content Amortization

2013A

2014A

2015A

1,420.1
701.9

1,657.7
998.6

1,905.1
1,500.3

Source: Macquarie Research, September 2016

After establishing our base, we forecast any additional content obligations that Netflix may obtain
in the future. We generate these estimates by taking Netflix stated content total obligations at the end of
2015 and forecast them out until 2019 based off of our content growth assumptions. Netflix provides a
table of total content obligations over a 5-year-plus period, which is significantly above its annual
amortized amount, indicating much more content to come.

Fig 7 Content amortization as compared to total content obligations ($m)


13,194

14,000
12,000

10,902

9,451

10,000
7,313

8,000
6,000

4,000

4,000

4,000

4,000

4,000
2,000

702

1,420

999

1,658

1,5001,905

1,122 1,112

0
2013
Int. Amortization

2014
2015
Dom. Amortization Total Content Obligations

2Q16 (6 mo. Ended)


Other Off BS obligations

Source: Macquarie Research, September 2016. Note: Netflix estimates other off-BS content obligations at $3-5bn.

Netflixs 2015 10-K states balance sheet obligations of $2.8 billion in current content obligations and
$2.0 billion in non-current obligations. For our purposes we assume amortization of both on and off
balance sheet items, as these obligations are already known. We believe this methodology offers a good
estimate of the true cost of content incurred in the given year. By assuming growth rates of 20% for <1
year and 1-3 year content obligations, as well as 10% growth for longer content obligations, we obtain a
total content obligation growth rate of 19% per year through 2019.

13 September 2016

Macquarie (USA) Research

Netflix

We also assume straight-line amortization, based on a 5 year useful life, of Netflixs unknown off
balance sheet content obligations. These are obligations which Netflix does not include in their stated
obligations, as they are hard to estimate. The company has repeatedly given out figures of between $3-5
billion. We used a midpoint estimate of $4 billion starting in 2017, as they have already guided to 2016
amortization expense. Our estimate implies an additional $800m in obligations added to the amortized
content obligations, each year.
We actually believe this to be a moderately conservative estimate as content obligations in 2013 and
2014 (primarily US) grew 29% and 30% respectively and Netflix now is in the midst of a protracted
scaling up of content investment to support its international roll-out, which we expect to continue for
many years.
When we consider the additional $3-5 billion of off-balance sheet obligations not listed in content
obligations (Netflix states that they do not consider these obligations currently as the ultimate amounts
are not known), we start to see the vastness of Netflixs content spending.

Fig 8

Content obligations estimates rising 19% annually

$m
More than 5 Years
Growth YoY %
3-5 Years
Growth YoY %
1-3 Years
Growth YoY %
Less than 1 year
Growth YoY %
Total Content Obligations
Growth YoY %

2013A

2014A

2015A

2016E

2017E

2018E

2019E

83.8

7,312.7
30%

44.1
-47%
1,164.3
18%
4,495.1
38%
3,747.6
26%
9,451.1
29%

58.0
32%
891.9
-23%
5,249.1
17%
4,703.2
25%
10,902.2
15%

63.9
10%
981.1
10%
6,299.0
20%
5,643.8
20%
12,987.7
19%

70.2
10%
1,079.2
10%
7,558.8
20%
6,772.6
20%
15,480.7
19%

77.3
10%
1,187.1
10%
9,070.5
20%
8,127.1
20%
18,461.9
19%

85.0
10%
1,305.8
10%
10,884.6
20%
9,752.5
20%
22,027.9
19%

1,678.7

2,138.4

1,451.1

2,085.5

3,293.0
800.0

3,781.2
800.0

4,366.0
800.0

989.6
3,266.9
2,972.3

Implied Total Change in Content Ob.


Additional $3-5bn not reflected on content obs.
Source: Macquarie Research, September 2016

As Netflix both produces content and licenses content, the next step is to attribute these changes
in obligations to either original programming or additional licensing content.
First, we figure out which Netflix originals have new episodes coming online in 2013-2016, and then
attribute a $2 million cost per episode estimate to each to obtain a figure for total original content cost in
each year. $2m is a rough estimate factoring in a mix of large Hollywood production budgets, which can
be $5m per episode or more, and less expensive local productions. In fact, Netflixs new original The
Get Down ended up costing $10m per episode!

Fig 9

Netflix 2016 content roster

Stranger Things:S1
The Get Down:S1
Flaked
The Characters
Lady Dynamite
F is for Family
DinoTrux
Home: Adventures of Tip and Oh
Voltron Legendary Defending
Kong King of the Apes
Pee-Wee's Big Holiday

House of Cards: S4
The Unbreakable Kimmy Schmidt S2
Bloodline: S2
Marco Polo: S2
Orange Is the New Black: S4
Bloodline:S2
Narcos:S2
Paranoid
3%
The OA
Special Correspondents

Project Mc2
Fuller House
Longmire
Trailer Park Boys
Chelsea
Fearless
Last Chance U
Marseille
Luke Cage
The Crown
The Fundamentals of Caring

Daredevil:S2
Grace and Frankie:S2
Bojack Horseman: S3
A series of unfortunate events
Crouching Tiger Hidden Dragon: Sword of Destiny
Tallulah
XOXO
Rebirth
Brahman Naman
The Fundamentals of Caring

Source: Macquarie Research, September 2016

13 September 2016

Macquarie (USA) Research

Netflix

By taking the year over year difference of these additional content cost estimates, we get the difference
in costs that is not explained by the amortization base in that year in other words, the breakdown
between originals and licensed content.
For example, we identify that, based on new episodes coming online in 2015, original content costs

would equate to an estimated $554m.


After estimating that original content costs for 2016 would come out to $992m, we back out the $554m

that we assume to be encompassed by the amortization streaming base.


We take the additional $438m and amortize it over its assumed useful life, to get the cost of this

additional original content in the given year.


We then forecast this change in original content obligations out until 2019 under the assumption
that the ratio of original programming obligations to total obligations steps up from our 2015
value of 20%, to a 2019 expected value of 40%, reflecting the companys comment that in 2014
original programming was ~10% of total cost, and its stated desire to move towards a content mix of half
original programming and half licensed content.

Fig 10

Netflix additional original content obligations as compared to total obligations

$m

2013A

2014A

2015A

2016E

2017E

2018E

2019E

Total Additional Content Obligations


Additional Original Programming
% of Total Content Obligations

1,678.7

2,138.4
213.8
10%

1,451.1
296.0
20%

2,085.5
438.0
25%

3,293.0
1,001.0
30%

3,781.2
1,338.5
35%

4,366.0
1,763.8
40%

Source: Company data, Macquarie Research, September 2016

Next, we attribute both additional original content costs and licensing costs to the domestic and
international segments. By using weights based on stated 2015 domestic vs. international streaming
costs, we create a stepped segment cost table, with the domestic proportion falling by 2% each year.
This assumes that the international streaming segment will contribute more to total streaming costs, in
2016, than domestic will.
By using our weights, we find how much of these new content obligations are assumed to be domestic
original programming, domestic licensing, international original programming, and international licensing.
Our results are as follows:

Fig 11 Netflix content obligations by segment and type


$m
Total Additional Content Obligations
Domestic Portion
International Portion
Additional Original Content
Domestic Portion
International Portion
Additional Non-Original
Domestic Portion
International Portion

2015A

2016E

2017E

2018E

2019E

1,451.1
754.6
696.5

2,085.5
1,042.7
1,042.7

3,293.0
1,580.7
1,712.4

3,781.2
1,739.4
2,041.9

4,366.0
1,921.0
2,444.9

296.0
153.9
142.1

438.0
219.0
219.0

987.9
474.2
513.7

1,323.4
608.8
714.6

1,746.4
768.4
978.0

1,155.1
600.7
554.5

1,647.5
823.7
823.7

2,305.1
1,106.5
1,198.7

2,457.8
1,130.6
1,327.2

2,619.6
1,152.6
1,467.0

Source: Company data, Macquarie Research, September 2016

Once we have our estimates for content obligations by type and segment, we estimate how much
this will cost Netflix in each of the forecasted years by building an amortization waterfall. Netflix
states that all obligations are amortized over a 6 month to 5 year basis. We assume a useful life of 1 year
for originals due to the fact that most of Netflixs users adhere to the binge watching mentality and
watch the entire new season of a show in a short period after the release. Original movies may have an
even shorter amortization schedule of 6 months. This also incorporates generally early watching of
movies, which Netflix is increasing production on. For licensed content, we assume a useful life of 3
years. For both originals and licensed content, we use the stated depreciation method of straight-line.
13 September 2016

Macquarie (USA) Research

Netflix

Use of a 1 year useful life (vs. 3 years) for amortizing original content isnt accretive to earnings it adds
$197m of amortization cost in 2016...

Fig 12

Amortization Waterfall

Amortization Waterfall- US ($M)


Domestic Original 2015
Domestic Original 2016
Domestic Original 2017
Domestic Original 2018
Domestic Original 2019
Domestic Original 2020
Total Yearly New Original Content Am.
Additional Non-Original
Domestic Non-Original 2015
Domestic Non-Original 2016
Domestic Non-Original 2017
Domestic Non-Original 2018
Domestic Non-Original 2019
Domestic Non-Original 2020
Total Yearly Non-Original Content Am.
Amortization Waterfall- International ($M)
International Original 2015
International Original 2016
International Original 2017
International Original 2018
International Original 2019
International Original 2020
Total Yearly New Original Content Am.
Additional Non-Original
International Non-Original 2015
International Non-Original 2016
International Non-Original 2017
International Non-Original 2018
International Non-Original 2019
International Non-Original 2020
Total Yearly Non-Original Content Am.

2015A

2016E

77.0

77.0
109.5

2017E
109.5
237.1

2018E

237.1
304.4

2019E

304.4
384.2

77.0

186.5

346.6

541.5

99.1

198.2
135.9

198.2
271.8
182.6

99.1
271.8
365.1
186.5

99.1

334.1

652.6

922.6

1,064.3

2015A
71.0

2016E
71.0
109.5

2017E

2018E

2019E

109.5
256.9

256.9
357.3

71.0

180.5

366.4

614.2

91.5

183.0
135.9

183.0
271.8
197.8

91.5
271.8
395.6
219.0

318.9

652.6

977.9

91.5

688.6

135.9
365.1
373.1
190.2

357.3
489.0
846.3

135.9
395.6
438.0
242.0
1,211.5

Source: Macquarie Research, September 2016

... but it does drive Netflixs cash taxes down each year, with savings of $50m in 2016 The following
table shows the effect of accelerated amortization for originals.

Fig 13

Netflix accelerated amortization tax shield

$m
Netflix Domestic Original Amortization (1 year)
Netflix International Original Amortization (1 year)
Total Original Amortization Expense
Netflix Effective Tax Rate
Netflix After Tax Cost of Amortization
Implied Taxes
Netflix Domestic Original Amortization (3 Years)
Netflix International Original Amortization (3 Years)
Total Original Amortization Expense
Netflix Effective Tax Rate
Netflix After Tax Cost of Amortization
Implied Taxes
Difference in Amortization Expense
Difference in Taxes Paid
Addition/Subtraction from NI

2015A

2016E

2017E

2018E

2019E

77.0
71.0
148.0
14%
127.9
(20.1)

186.5
180.5
367.0
26%
273.0
(94.0)

346.6
366.4
713.0
33%
477.7
(235.3)

541.5
614.2
1,155.7
33%
772.0
(383.7)

688.6
846.3
1,534.9
33%
1,028.4
(506.5)

25.4
23.4
48.8
14%
42.2
(6.6)

86.9
83.0
170.0
26%
126.4
(43.5)

201.3
203.9
405.2
33%
271.5
(133.7)

354.6
383.2
737.8
33%
492.8
(244.9)

520.3
602.9
1,123.2
33%
752.5
(370.6)

99.2
(13.5)
(85.7)

197.1
(50.4)
(146.6)

307.7
(101.6)
(206.2)

417.9
(138.7)
(279.2)

411.7
(135.9)
(275.9)

Source: Macquarie Research, September 2016

13 September 2016

Macquarie (USA) Research

Netflix

Once we have our additional content amortization expense attributed to segment and type, we
account for the other costs related to streaming cost of revenues. Content depreciation accounted
for 77% of Netflixs 2015 domestic costs of revenues with other expenses such as content delivery fees
and customer billing making up the other 23%. For international, other content expenses accounted for
16% of total costs of revenues in 2015. We attach a growth assumption of 7% for the US the rate in
2015 and for international we step down gradually from last years rate of 80% to arrive at our
forecasted figures for 2016-2019.

Fig 14

Calculation of other streaming costs


2013A

2014A

2015A

2016E

2017E

2018E

2019E

443.3
80.4

544.1
155.5
93%

582.1
280.1
80%

622.9
462.4
65%

666.5
694.0
50%

713.1
937.5
35%

763.0
1125.8
20%

Domestic other streaming costs


International other streaming costs
Yoy Growth

Source: Company data, Macquarie Research, September 2016

Tying all of these costs estimates together, we forecast our total cost of streaming estimates for
the domestic and international segments, from 2015-2019.

Fig 15

Total content cost estimates

US content costs ($m)

2015A

2016E

2017E

2018E

2019E

US streaming content base


US cost of additional original programming
US cost of additional content obligations
Additional content streaming costs
Total

$1,905

$1,905
$186
$334
$623
$3,049

$1,905
$347
$653
$666
$3,571

$1,905
$541
$923
$713
$4,082

$1,905
$689
$1,064
$763
$4,421

$1,500
$181
$319
$462
$2,462

$1,500
$366
$653
$694
$3,213

$1,500
$614
$978
$937
$4,030

$1,500
$846
$1,212
$1,126
$4,684

$3,405
$367
$653
$1,085
$5,511

$3,405
$713
$1,305
$1,360
$6,784

$3,405
$1,156
$1,900
$1,651
$8,112

$3,405
$1,535
$2,276
$1,889
$9,105

International content costs


Intl streaming content base
Intl cost of additional original programming
Intl cost of additional content obligations
Additional content streaming costs
Total
Total content costs
Global streaming content base ($m)
Global cost of additional original programming
Global cost of additional content obligations
Additional content streaming costs
Total

$582
$2,487

$1,500

$280
$1,780

$3,405

$862
$4,268

Source: Company data, Macquarie Research, September 2016

Based on our calculations, we believe that total Netflix content costs will rise domestically to $4.4
billion in 2019 and to $9.1 billion globally. Internationally, our data suggests Netflix content cost
will grow to an estimated ~$4.7 billion by 2019, surpassing the domestic segment.
Seeing as the domestic segment has recently seen slowing revenue growth based on slowing subscriber
growth, these outlined higher content costs need to be offset by additional international sub growth or
higher fees. We acknowledge the rise in international subscribers and ARPU, due to ungrandfathering,
will offer some cushion against these costs.

Estimate changes
On the back of this analysis we are reducing 2017-2019 EPS:
2017 from $0.85 to $0.74, vs consensus $0.89
2018 from $1.54 to $1.33 vs consensus $1.79
2019 from $2.15 to $2.12 vs consensus $3.06

13 September 2016

Macquarie (USA) Research

Netflix

There are a lot of assumptions in these calculations, which weve tried to keep conservative, and our
Netflix P&L is very sensitive to changes. While we havent tried to match the calculations above
precisely into our model, we use this as a guide and incorporate the trends. And based on the country
views outlined in our sector report, and the substantial effort Netflix needs to establish itself in new
markets, we see near-term downside risk to Netflix earnings, and a more modest valuation implicit in the
name.

Valuation
If trying to forecast out Netflixs subscriber and content cost growth is a fools game, valuing NFLX on
traditional multiples is even moreso. The stock trades at 134.6x 2017 PE and 74.2x EV/EBITDA, clearly
factoring in longer-term upside. Compared with AMZN at 50x 2017 PE and 16x EV/EBITDA, its hard to
justify NFLX on a nearer-term view. The comparison between these two cant be direct, but Amazon is a
much broader business that we find it hard to declare Netflix superior to overall.
Our DCF, incorporating the subscriber and content cost elements discussed above, points to value at
$79. This is based on a WACC of 12.3% and a blended average of two terminal multiples,5% LT EBIT
growth and 12x EV/EBITDA both fairly generous, in our view.

Fig 16

NFLX still looks very expensive vs. AMZN


EPS

NFLX
AMZN

Price

2016E

2017E

EBITDA ($bn)
2016E
2017E

2016E

2017E

EV/EBITDA
2016E
2017E

$99.05
$771.49

$0.20
$5.56

$0.74
$15.55

$80
$1,570

494.1x
139.0x

134.6x
50.0x

555.1x
23.0x

$526
$2,250

P/E

74.2x
16.0x

Source: Company data, Macquarie Research, September 2016

Risks to our call


Quarterly earnings. While we are thinking more near-to-intermediate term in our negative view, we are
not making a Q3 call. Quarterly earnings are often major drivers of NFLX share price, and Q by Q its
next to impossible to guess progress beyond Netflixs guidance, which management has missed lately
after hitting consistently the previous few years.
Netflix has not issued guidance beyond this year, other than to say they expect 2017 to show substantial
earnings growth, and that FCF will again be substantially negative at around ($1bn). This implies more
cost pressure to us, but no one knows what to expect on earnings. Consensus has fallen to $0.89 for
2017 EPS, but with a range of $0.18 to $1.38. If Netflix finishes 2016 at our $0.20 estimate, then our
2017 estimate of $0.74 still implies a more than tripling of earnings.
Popularity of shows. With 600 hours of originals on, its certainly possible Netflix can generate a hit or
three or keep and attract more subscribers.
Could NFLX itself be a target? There are plenty of TMT firms worldwide with larger market caps that
could view Netflix as an attractive asset for their own global expansions. However, we dont think
management has any interest in selling, and we dont sense any shareholder pressure to do so.

13 September 2016

10

Macquarie (USA) Research

Fig 17

Netflix

Netflix P&L
1Q 15

2Q 15

3Q 15

4Q 15

1Q 16

2Q 16

3Q 16E

4Q 16E

2015

2016E

2017E

2018E

2019E

REVENUE
Domestic Streaming
% change

985
23.2%

1,026
22.4%

1,064
21.3%

1,106
20.5%

1,161
17.9%

1,208
17.8%

1,305
22.6%

1,326
19.9%

4,180
21.8%

5,000
19.6%

5,748
14.9%

6,427
11.8%

7,117
10.8%

Domestic DVD
% change

173
-15.1%

164
-15.8%

158
-15.6%

151
-15.9%

145
-16.4%

139
-15.4%

131
-16.7%

124
-17.7%

646
-15.6%

539
-16.5%

458
-15.0%

389
-15.0%

331
-15.0%

Domestic Total
% change

1,158
15.4%

1,190
15.2%

1,221
14.8%

1,257
14.6%

1,306
12.8%

1,347
13.2%

1,436
17.6%

1,450
15.4%

4,826
15.0%

5,539
14.8%

6,206
12.0%

6,816
9.8%

7,449
9.3%

International Streaming
% change

415
55.6%

455
47.9%

517
49.5%

566
46.1%

652
56.9%

758
66.7%

848
64.1%

938
65.6%

1,953
49.4%

3,196
63.6%

4,405
37.8%

5,370
21.9%

6,403
19.3%

REVENUE TOTAL
% change

1,573
23.9%

1,645
22.7%

1,738
23.3%

1,823
22.8%

1,958
24.4%

2,105
28.0%

2,284
31.4%

2,388
31.0%

6,780
23.2%

8,735
28.8%

10,611
21.5%

12,186
14.8%

13,852
13.7%

Cost of revenues
Domestic streaming cost of revenues
% change
Domestic DVD cost of revenues
% change
International streaming cost of revenues
% change

583
12.7%
89
-17.1%
375
53.0%

613
12.2%
86
-15.5%
423
58.6%

645
14.1%
78
-20.0%
451
54.6%

647
12.9%
71
-21.4%
531
51.6%

667
14.4%
73
-17.5%
630
67.8%

707
15.4%
68
-21.2%
698
65.1%

755
17.0%
66
-15.0%
745
65.0%

744
15.0%
61
-15.0%
876
65.0%

2,487
13.0%
324
-18.4%
1,780
54.3%

2,872
15.5%
268
-17.3%
2,949
65.6%

3,217
12.0%
228
-15.0%
3,752
27.3%

3,539
10.0%
193
-15.0%
4,462
18.9%

3,822
8.0%
164
-15.0%
5,217
16.9%

1,046
20.4%
527

1,122
22.6%
523

1,174
23.0%
564

1,249
23.2%
574

1,370
30.9%
588

1,473
31.3%
632

1,565
33.3%
719

1,681
34.5%
707

4,591
22.3%
2,188

6,089
32.6%
2,646

7,197
18.2%
3,414

195
42.0%
3.1%
143
29.7%
2.3%
91
63.7%
1.5%
429
41.5%

197
63.2%
3.0%
155
34.6%
2.4%
96
59.8%
1.5%
448
51.4%

208
42.9%
3.0%
172
42.0%
2.5%
111
42.1%
1.6%
491
42.4%

224
10.1%
3.1%
181
43.7%
2.5%
109
42.5%
1.5%
514
26.8%

208
6.8%
2.7%
204
42.2%
2.6%
127
42.5%
1.6%
539
25.5%

216
9.6%
2.6%
207
33.7%
2.5%
138
42.5%
1.6%
562
25.4%

290
39.2%
3.2%
232
35.0%
2.5%
139
25.0%
1.5%
660
34.5%

291
29.7%
3.0%
244
35.0%
2.6%
136
25.0%
1.4%
671
30.5%

824
35.7%
12.2%
651
37.8%
9.6%
407
51.0%
6.0%
1,882
39.5%

1,004
21.9%
11.5%
887
36.3%
10.2%
541
32.7%
6.2%
2,432
29.2%

1,145
14.0%
10.8%
967
9.0%
9.1%
568
5.0%
5.3%
2,679
10.2%

8,194
13.9%
3,991
8,001
1,234
7.8%
10.1%
1,025
6.0%
8.4%
603
6.2%
4.9%
2,862
6.8%

9,204
12.3%
4,648
9,039
1,310
6.1%
9.5%
1,076
5.0%
7.8%
626
3.8%
4.5%
3,011
5.2%

97
6.2%

75
4.6%

74
4.2%

60
3.3%

49
2.5%

70
3.3%

59
2.6%

36
1.5%

306
4.5%

215
2.5%

735
6.9%

1,130
9.3%

1,637
11.8%

332
21.1%

326
19.8%

356
20.5%

350
19.2%

380
19.4%

416
19.8%

429
18.8%

417
17.4%

1,364
20.1%

1,642
18.8%

2,269
21.4%

2,758
22.6%

3,339
24.1%

75
4.7%

55
3.3%

59
3.4%

39
2.1%

26
1.3%

52
2.5%

14
0.6%

(13)
-0.5%

228
3.4%

80
0.9%

526
5.0%

897
7.4%

1,366
9.9%

(59)
38

(34)
40

(31)
42

(39)
21

(10)
40

(19)
51

(34)
25

(34)
2

15
38.3%

14
35.0%

13
30.3%

(22)
-108.3%

12
30.6%

10
20.5%

7
28.0%

1
28.0%

(164)
142
19
13.6%

(97)
118
30
25.6%

(254)
481
159
33.0%

(254)
876
291
33.3%

(254)
1,383
457
33.0%

24

26

29

43

28

41

18

122.6

87.8

322.5

584.8

926.9

423.6
433.8

425.3
436.1

426.9
437.6

427.7
438.3

428.1
438.0

428.1
438.2

428.1
438.0

428.1
438.2

425.9
436.4

428.1
438.1

428.1
438.1

428.1
438.1

428.1
438.1

0.10
0.10 $
-4.8%

0.06
0.06 $
15.8%

0.10
0.09 $
54.0%

1.37 $
1.33 $
81.3%

2.17
2.12
58.5%

Total cost of revenues


% change
Gross profit
Operating expenses
Marketing Total
% change
% of annualized revenue
Technology and development
% change
% of annualized revenue
General & administrative
% change
% of annualized revenue
Total operating expenses
% change
Operating income
Operating margin
Contribution profit
Contribution margin
EBITDA
EBITDA margin
Net interest expense
Interest and other income
Earnings before income taxes
Other
Provision for income taxes
Tax rate
Net income (GAAP)
Average basic shares outstanding (m)
Average diluted shares outstanding (m)
EPS - basic (GAAP)
EPS - diluted (GAAP)
% change

0.06
0.05 $
-55.7%

0.06
0.06 $
-63.3%

0.07
0.07 $
-50.9%

0.04
0.04 $
-39.5%

0.00
0.00
-96.4%

$
$

0.29 $
0.28 $
-46.8%

0.21 $
0.75 $
0.20 $
0.74 $
-28.7%
267.2%

Source: Company Data, Macquarie Research, September 2016

13 September 2016

11

Ticker Bloombg

Rec

4324 JP
HAV FP
IPG US
OMC US
PUB FP
WPP LN

N
N
O
O
O
O

5,530
7.46
$22.75
$85.30
66.94
1749p

5,700
7.50
$26.00
$90.00
78.00
1950p

1,576,826
3,178
$9,312
$20,566
15,130
22,737

161,409
32
$1,063
$2,902
2,064
3,328

1,738,236
3,210
$10,375
$23,468
17,194
26,065

168,599
355
$1,170
$2,317
1,747
2,244

179,157
378
$1,253
$2,430
1,869
2,405

307
0.43
$1.29
$4.71
4.65
113.1p

345
0.47
$1.44
$5.22
4.97
122.7p

10.3x
9.0x
8.9x
10.1x
9.8x
11.6x
10.0x

9.7x
8.5x
8.3x
9.7x
9.2x
10.8x
9.4x

18.0x
17.4x
17.7x
18.1x
14.4x
15.5x
16.8x

16.0x
15.8x
15.8x
16.3x
13.5x
14.3x
15.3x

0.9x
3.2x
2.9x
1.0x
1.5x
0.7x
1.7x

10.2%
4.9%
7.5%
6.6%
6.7%
5.1%
6.8%

1.4%
2.3%
2.6%
2.6%
3.0%
3.2%
2.5%

1.1x
0.1x
1.0x
1.3x
1.3x
1.6x
1.1x

Publishing & Information


comScore
SCOR US
N
Nielsen
NLSN US
O
News Corp'
NWSA US
O
Time Inc.
TIME US
O
Pearson
PSON LN
O
RELX Group*
REL LN
N
Thomson Reuters*
TRI CA
N
Wolters Kluwer*
WKL NL
O
Publishing average (excl. NWSA and TIME)

$30.68
$52.71
$13.90
$14.47
776p
1414p
C$53.91
37.09

$29.00
$61.00
$15.18
$20.00
1025p
1200p
C$49.90
42.00

$1,739
$18,937
$8,067
$1,484
6,324
15,710
$31,215
8,639

-$127
$7,662
-$1,883
$918
1,052
3,769
$4,534
1,560

$1,612
$26,599
$6,184
$2,402
7,376
19,479
$35,748
10,199

$126
$1,973
$882
$408
792
2,238
$3,178
1,110

$158
$2,124
$943
$437
899
2,344
$3,318
1,174

$1.42
$2.88
$0.41
$1.18
56.7p
64.6p
$2.07
2.04

$1.93
$3.27
$0.55
$1.44
64.4p
68.8p
$2.38
2.23

12.8x
13.5x
7.0x
5.9x
9.3x
15.0x
13.3x
11.8x
12.6x

10.2x
12.5x
6.6x
5.5x
8.2x
14.3x
12.2x
10.8x
11.4x

21.5x
18.3x
33.5x
12.3x
13.7x
21.9x
25.5x
18.7x
19.9x

15.9x
16.1x
25.2x
10.1x
12.1x
20.6x
22.2x
17.2x
17.3x

-1.0x
1.9x
2.5x
1.7x
-0.7x
3.2x
-8.3x
4.6x
-0.1x

9.1%
5.0%
9.1%
11.9%
5.2%
4.5%
4.0%
4.7%
5.4%

0.0%
2.3%
1.4%
5.6%
6.7%
2.2%
2.8%
2.1%
2.7%

-1.3x
4.1x
-2.3x
2.1x
1.2x
1.8x
1.4x
1.4x
1.4x

$52.15
$52.76
$93.64
$25.18
$16.07
$23.95
196p
$99.05
$62.88
845p
$78.37
$38.08
17.50

$75.00
$65.00
$110.00
$27.00
$23.00
$27.00
210p
$85.00
$65.00
1400p
$90.00
$44.00
24.50

$3,821
$24,006
$153,851
$15,511
$930
$45,888
7,860
$43,404
$8,161
14,526
$62,335
$15,133
26,401

$2,310
$8,070
$16,107
$7,754
$129
$14,752
-27
$982
$3,700
5,446
$21,972
$11,805
-4,166

$6,131
$32,076
$169,958
$23,265
$1,059
$60,640
7,833
$44,386
$11,861
19,972
$84,307
$26,938
22,235

$901
$3,453
$17,507
$2,437
$103
$6,753
969
$80
$1,393
2,173
$8,177
$3,097
1,273

$915
$3,673
$17,934
$2,472
$153
$7,139
1,070
$598
$1,453
2,110
$9,280
$3,265
1,407

$5.84
$4.10
$5.79
$2.10
$0.56
$1.84
18.0p
$0.20
$5.10
56.7p
$5.42
$3.88
0.58

$6.33
$4.53
$6.12
$2.31
$1.18
$2.04
20.1p
$0.74
$5.37
63.1p
$6.26
$4.20
0.66

6.8x
9.3x
9.7x
9.5x
10.3x
9.0x
8.1x
555.1x
8.5x
9.0x
10.3x
8.7x
11.1x
8.9x

6.7x
8.7x
9.5x
9.4x
6.9x
8.5x
7.3x
74.2x
8.2x
9.1x
9.1x
8.2x
10.3x
8.5x

8.9x
12.9x
16.2x
12.0x
28.9x
13.0x
10.9x
494.1x
12.3x
13.2x
14.5x
9.8x
27.8x
12.4x

8.2x
11.6x
15.3x
10.9x
13.7x
11.7x
9.8x
134.6x
11.7x
13.9x
12.5x
9.1x
24.4x
11.5x

0.5x
0.5x
1.3x
0.6x
-0.6x
1.0x
1.1x
-17.2x
3.7x
-5.3x
1.0x
-0.3x
2.3x
0.4x

9.2%
8.9%
4.9%
7.5%
1.8%
8.0%
6.7%
-2.7%
8.7%
3.9%
6.6%
11.4%
3.6%
7.6%

0.0%
1.3%
1.4%
0.0%
0.0%
1.6%
2.2%
0.0%
1.7%
4.0%
2.1%
4.2%
11.4%
1.8%

2.8x
2.6x
1.0x
3.3x
1.0x
2.3x
0.0x
4.3x
2.9x
2.5x
2.9x
2.9x
-3.3x
2.3x

S&P 500
$2,159
18.2x
STOXX Europe 600
342.23
16.7x
* Stocks covered by Giasone Salati in London
Stock is covered by Guy Peddy in London; June year-end
~ Stock covered by Nathan Ramler in Tokyo; March year-end
' Stock is co-covered by Tim Nollen in New York and Andrew Levy in Sydney
Notes: News Corp, 21st Century Fox, and Sky EBITDA & EPS are presented on a calendarized basis. Eros is March year-end so 2016E here is its fiscal 2017E. Disney and Viacom are September year-end.

16.0x
14.7x

Company
Advertising
Dentsu~
Havas
Interpublic
Omnicom
Publicis
WPP
Advertising average

12-Sep-16
Price

TV & Entertainment
AMC Networks
AMCX US
O
CBS
CBS US
O
Disney
DIS US
O
Discovery
DISCA US
N
Eros International
EROS US
O
21st Century Fox
FOXA US
N
ITV*
ITV LN
N
Netflix
NFLX US
U
Scripps Networks
SNI US
N
Sky
SKY LN
O
Time Warner
TWX US
O
Viacom
VIAB US
N
Vivendi*
VIV FP
O
TV & Entertainment average (excl. NFLX and VIV)

Price
target

Mkt Cap
(m)

Net debt
(m)

EV
(m)

EBITDA (m)
2016E
2017E

EPS
2016E

2017E

EV/EBITDA
2016E
2017E

P/E
2016E

2017E

PEG r
2016E

FCF y
2016E

Div y
2016E

Net D/
EBITDA

Macquarie (USA) Research

13 September 2016

Fig 18 US and European Media Comps

Source: Company Data, Macquarie Research, September 2016

Netflix

12

Macquarie (USA) Research

Netflix

Macquarie Quant View

398/539
Global rank in
Retailing
% of BUY recommendations
Number of Price Target downgrades
Number of Price Target upgrades

Attractive

Displays where the companys


ranked based on the fundamental
consensus Price Target and
Macquaries Quantitative Alpha
model.
Two rankings: Local market (United
States) and Global sector
(Retailing)

Fundamentals

The quant model currently holds a marginally negative view on Netflix. The
strongest style exposure is Quality, indicating this stock is likely to have a
superior and more stable underlying earnings stream. The weakest style
exposure is Profitability, indicating this stock is not efficiently converting
investments to earnings; proxied by ratios like ROE or ROA.

Quant

55% (23/42)
0
0

Local market rank

Global sector rank

Macquarie Alpha Model ranking

Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score


(higher is better).

For the comparable firms this chart shows the key underlying styles and their contribution
to the current overall Alpha score.

Time Warner Inc


Alphabet

Alphabet

1.5

The Walt Disney Company

The Walt Disney Company

1.4

Facebook

Facebook

1.4

Eros International

Eros International

0.5

Netflix

Netflix

-0.4

Twitter
-3.0

Time Warner Inc

1.8

Twitter

-1.2
-2.0

-1.0

0.0

1.0

2.0

-100%

3.0

Valuations

-80%

Growth

-60%

-40%

Profitability

-20%

0%

Earnings
Momentum

20%

40%

60%

Price
Momentum

80%

100%

Quality

Macquarie Earnings Sentiment Indicator

Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions


signal that favours analysts who have more timely and higher conviction
revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes in
forward earnings estimates and the resulting change in earnings multiple.

Time Warner Inc


Alphabet

Alphabet

0.6

The Walt Disney Company

The Walt Disney Company

-0.2

Facebook

Facebook

0.8

Eros International

Eros International

0.2

Netflix

Netflix

-0.1

Twitter
-3.0

Time Warner Inc

0.5

Twitter

-0.6
-2.0

-1.0

0.0

1.0

2.0

-100%

3.0

Dividend Return

-50%

Multiple Return

0%

50%

Earnings Outlook

100%

1Yr Total Return

What drove this Company in the last 5 years

How it looks on the Alpha model

Which factor score has had the greatest correlation with the companys
returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is better)
and the percentile rank relative to the sector and market.

Negatives Positives

Price to Book FY0


EV/EBITDA FY0

28%

Capex Growth

25%

Change in PPE FY0

23%

Net Buybacks to Mkt Cap

-26%

Return on Assets NTM

-27%

Turnover (USD) 250 Day


Sales Growth FY1
-40%

Normalized
Score

32%

-30%
-34%
-20%

0%

20%

40%

Alpha Model Score


Valuation
Growth
Profitability
Earnings Momentum
Price Momentum
Quality
Capital & Funding
Liquidity
Risk
Technicals & Trading

Percentile relative
to sector(/539)

Percentile relative
to market(/3159)

-0.45
-0.57
-0.68
-0.99
-0.30
-0.41
-0.03
0.43
-1.23
-0.28
-0.36

50

100 0

50

100

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and
screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com)

13 September 2016

13

Macquarie (USA) Research

Netflix

Important disclosures:
Recommendation definitions

Volatility index definition*

Financial definitions

Macquarie - Australia/New Zealand


Outperform return >3% in excess of benchmark return
Neutral return within 3% of benchmark return
Underperform return >3% below benchmark return

This is calculated from the volatility of historical price


movements.

All "Adjusted" data items have had the following


adjustments made:
Added back: goodwill amortisation, provision for
catastrophe reserves, IFRS derivatives & hedging, IFRS
impairments & IFRS interest expense
Excluded: non recurring items, asset revals, property
revals, appraisal value uplift, preference dividends &
minority interests

Benchmark return is determined by long term nominal


GDP growth plus 12 month forward market dividend yield

Very highhighest risk Stock should be expected


to move up or down 60100% in a year investors
should be aware this stock is highly speculative.
High stock should be expected to move up or
down at least 4060% in a year investors should
be aware this stock could be speculative.

Macquarie Asia/Europe
Outperform expected return >+10%
Neutral expected return from -10% to +10%
Underperform expected return <-10%

Medium stock should be expected to move up or


down at least 3040% in a year.

Macquarie South Africa


Outperform expected return >+10%
Neutral expected return from -10% to +10%
Underperform expected return <-10%

Lowmedium stock should be expected to move


up or down at least 2530% in a year.

Macquarie - Canada
Outperform return >5% in excess of benchmark return
Neutral return within 5% of benchmark return
Underperform return >5% below benchmark return
Macquarie - USA
Outperform (Buy) return >5% in excess of Russell 3000
index return
Neutral (Hold) return within 5% of Russell 3000 index
return
Underperform (Sell) return >5% below Russell 3000
index return

Low stock should be expected to move up or


down at least 1525% in a year.
* Applicable to Asia/Australian/NZ/Canada stocks
only

EPS = adjusted net profit / efpowa*


ROA = adjusted ebit / average total assets
ROA Banks/Insurance = adjusted net profit /average
total assets
ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
*equivalent fully paid ordinary weighted average number
of shares
All Reported numbers for Australian/NZ listed stocks are
modelled under IFRS (International Financial Reporting
Standards).

Recommendations 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations

Recommendation proportions For quarter ending 30 June 2016


Outperform
Neutral
Underperform

AU/NZ
45.17%
36.21%
18.62%

Asia
56.00%
28.59%
15.41%

RSA
36.36%
40.26%
23.38%

USA
43.16%
50.38%
6.46%

CA
63.39%
29.46%
7.14%

EUR
45.91% (for global coverage by Macquarie, 6.27% of stocks followed are investment banking clients )
36.96% (for global coverage by Macquarie, 6.33% of stocks followed are investment banking clients)
17.12% (for global coverage by Macquarie, 5.38% of stocks followed are investment banking clients )

NFLX US vs S&P 500, & rec history

(all figures in USD currency unless noted)


Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Capital (USA), September 2016


12-month target price methodology
NFLX US: US$85.00 based on a DCF methodology
Company-specific disclosures:
Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.
Date
Stock Code (BBG code)
Recommendation
Target Price
19-Jul-2016
NFLX US
Neutral
US$85.00
18-Apr-2016
NFLX US
Neutral
US$110.00
20-Jan-2016
NFLX US
Neutral
US$120.00
16-Jul-2015
NFLX US
Neutral
US$113.00
16-Apr-2015
NFLX US
Neutral
US$67.88
21-Jan-2015
NFLX US
Neutral
US$50.02
15-Jan-2015
NFLX US
Neutral
US$42.87
16-Oct-2014
NFLX US
Neutral
US$50.02
28-Jan-2014
NFLX US
Neutral
US$57.16
22-Oct-2013
NFLX US
Neutral
US$53.59
17-Oct-2013
NFLX US
Neutral
US$42.87
Target price risk disclosures:
NFLX US: Weaker than expected subscriber trends, higher content costs, more competition.
Analyst certification:
We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their
securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views
expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors
including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Groups Investment Banking activities.
General disclaimers:
Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets North America Ltd;
Macquarie Capital (USA) Inc; Macquarie Capital Limited and Macquarie Capital Limited, Taiwan Securities Branch; Macquarie Capital Securities (Singapore)
Pte Ltd; Macquarie Securities (NZ) Ltd; Macquarie Equities South Africa (Pty) Ltd; Macquarie Capital Securities (India) Pvt Ltd; Macquarie Capital Securities

13 September 2016

14

Macquarie (USA) Research

Netflix

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