Valuation of Netflix Inc. Harvard Case Solution & Analysis



Netflix, Inc. operated in a service industry and was the largest U.S. online movie rental subscription service in early 2009. It achieved $1.364 billion in revenues in 2008 by providing approximately 10 million subscribers with access to over 100,000 DVD and Blu-ray titles by mail and over 12,000 streaming content choices.

Problem Identification

The valuation of Netflix has been done through three different methods. The problem is to identify the differences and compare these three valuation models to come to a conclusion about the fair value of the stock. In a service industry, a particular attention is paid to the customer lifetime value (CLV) and the valuation method that is derived from this phenomenon.


Netflix’s services presented distinguished offers to its customers. It provided data about the company and customers so that it could be easy to assess its performance and forecast the intrinsic value of the company.

The service industry is a very different industry because it does not rely on the tangible goods for its sales. The company gets monetary claims in return for their services. For Netflix, the amount came in the form of subscription charges and rentals. Netflix had different types of customers. Some of them were old and repeated their purchases whereas; others were relatively new. Both types of customers had different characteristics. However, Netflix operated in a way to cater the particular needs of both the group so that their satisfaction level is increased and the company as a whole can be benefitted from it.

Netflix had a direct interaction with its customers so, it was relatively easier for the company to gather the customer information and assess it against the financial performance; therefore, improved methods can be generated to increase the sales. Netflix, and the whole rental service industry was facing a severe threat from the alternative method of downloading the entertainment rather than renting it physically.

Valuation of Netflix

There are different methods like payback method, discounted payback method, NPV, IRR, profitability index and comparability matrices through which an analyst can value different projects and company’s worth. Sometimes, these methods help the company’s internal management to choose among different alternatives that may benefit the company. Since the company’s resources are limited, hence; the company cannot choose all the projects that are profitable. Thus, through this valuation technique companies are able to identify the most profitable sector according to their strengths.

Discounted Cash Flow (DCF) Approach

In a DCF model, forecasts are made about the future revenues and costs to arrive at free cash flows for a specific period. At the end of the period, the terminal value is projected at a constant rate to find out the lifetime value of the business till it ends. The terminal value suggests that the project has worth even after the forecasted period and that it will not end after five or ten years. Thus, an NPV is calculated using all the cash inflows and outflows at a discounted level to consider the time value of money.

Usually, a DCF model is initiated by projecting the amount of expected sales and the sales growth. Since Netflix operates in a different industry so, the revenues are calculated by projecting new customer acquisitions, declining SACs, constant percentages of trial subscriptions that are free, separate churn-rate assumptions for trial and returning customers.

The growth rates, decline rates and other assumptions are derived from the trend data and are adjusted according to the market expectations. However, these assumptions do not include the fact that the downloading system will eventually speed up the extinction of the rental business because people are more likely to use easier and cheaper methods to fulfill their needs and desires.

The cash flows are discounted at the weighted average cost of capital that is calculated by the CAPM model. The overall equity value is divided by number of shares so that price per share can be calculated. This shows the actual worth of the company’s stock. This price is then compared with the current share price to conclude analysts’ recommendation.

If the fair price of the stock is lower, then the analyst recommend to sell, however if it is average, then recommendation is to hold, while it is advised to buy the stock if the fair price is higher than the current rate.

Comparable Company Valuation

In the comparable company valuation, the company under study is compared against its peers to check if the relative performance of the company is outperforming others and if the resulting lower value of the stock is due to the industry trends rather than company’s internal problems.

According to the comparable analysis, Netflix’s stock price at the time of the analysis resulted in a 2009 P/E ratio of 26.3× and an EV/EBIDTA ratio of 11.6× compared with the comparable group at 21.8× and 9.2× which meant........................

This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.

Designed for the MBA, the case for evaluation Netflix, Inc, which was the largest U.S. online movie rental subscription service in early 2009. After considering the historical financial and customer relationship Netflix performance, this case presents three approaches to assessing the company in early 2009. First, it is the level of analysis of discounted cash flows based on the pro forma projections of revenues, income and cash flow. The second approach tries to judge the prevailing market value of Netflix was reasonable by comparing selected the company's relationship with those of comparable companies. The final approach is based on the assumption that the value of the company Netflix (EV) was the sum of the current and future subscribers values ​​(discounted value, to be precise). There is also a spreadsheet available to students (UV4344). "Hide
by Phillip E. Pfeifer, Robert M. Conroy Source: Darden School of Business 13 pages. Publication Date: December 21, 2009. Prod. #: UV3928-PDF-ENG

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