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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
6,780
228
123
0.28
-46.8
352.4
0.00
0.0
194.8
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
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
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.
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
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.
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.
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
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 $2,487m.
13 September 2016
Netflix
We also estimated based on our calculation of Netflixs total content cost that Netflix would need to hit
43m US subscribers in 2015 to meet domestic earnings expectations. We didnt think Netflix could
add this many subs, but it did, closing the year at 44.7m.
But US sub growth is now slowing due in part to the law of large numbers and in part to some
elasticity of demand with the ungrandfathering of price increases this summer. While investors have
stressed over this, we pointed in our Q2 earnings note Pricing grows but volume slows, 18 July 2016 to
the rising value of Netflixs revenue growth, with ASP up 4.5% and ARPU up 5.7%, leading to a revenue
and earnings beat vs guidance and consensus. This should provide a shield to earnings, but we think
investors will remain focused on the raw sub numbers for now.
Fig 2 Boost in ARPU offers short term domestic revenue growth relief
ARPU ($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
2Q16
3Q16
4Q16
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.
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
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
Netflix
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
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
Country
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%
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
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
Netflix
2013A
2014A
2015A
1,420.1
701.9
1,657.7
998.6
1,905.1
1,500.3
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.
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
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
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
$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
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
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
13 September 2016
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
Fig 10
$m
2013A
2014A
2015A
2016E
2017E
2018E
2019E
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%
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:
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
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
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
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
... 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
$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)
13 September 2016
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
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%
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
2015A
2016E
2017E
2018E
2019E
$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
$582
$2,487
$1,500
$280
$1,780
$3,405
$862
$4,268
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
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
$79. This is based on a WACC of 12.3% and a blended average of two terminal multiples,5% LT EBIT
growth and 12x EV/EBITDA both fairly generous, in our view.
Fig 16
NFLX
AMZN
Price
2016E
2017E
EBITDA ($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
13 September 2016
10
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%
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%
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
$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
13 September 2016
Netflix
12
Netflix
398/539
Global rank in
Retailing
% of BUY recommendations
Number of Price Target downgrades
Number of Price Target upgrades
Attractive
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
For the comparable firms this chart shows the key underlying styles and their contribution
to the current overall Alpha score.
Alphabet
1.5
1.4
1.4
Eros International
Eros International
0.5
Netflix
Netflix
-0.4
Twitter
-3.0
1.8
-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
Breakdown of 1 year total return (local currency) into returns from dividends, changes in
forward earnings estimates and the resulting change in earnings multiple.
Alphabet
0.6
-0.2
0.8
Eros International
Eros International
0.2
Netflix
Netflix
-0.1
Twitter
-3.0
0.5
-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%
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
28%
Capex Growth
25%
23%
-26%
-27%
Normalized
Score
32%
-30%
-34%
-20%
0%
20%
40%
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
Netflix
Important disclosures:
Recommendation definitions
Financial definitions
Macquarie Asia/Europe
Outperform expected return >+10%
Neutral expected return from -10% to +10%
Underperform expected return <-10%
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
Recommendations 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations
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 )
13 September 2016
14
Netflix
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15
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