Netflix due diligence report

Oto Suvari
Oct 17 · 3 min read

Hatchworks has conducted due diligence on Netflix, a streaming service that allows their customers to watch a wide variety of award-winning TV shows, films and documentaries on thousands of internet-connected devices, continuously by subscription. It is currently listed on the Nasdaq stock exchange under the symbol ‘’NFLX’’.

Financials — Netflix
(Source: Marketscreener.com)

Netflix’s current market cap is $124B and stock price is around $299.

With a predicted net-income growth of 57% for 2020E and 2021E, and a net income estimate for 2021E of in excess of $3.9B, this points to a P/E ratio of 33.4x.

The revenue/sales forecast is $24.7B for 2020E, indicating an EV/Sales ratio of 5.44x.

In terms of profitability, an operating margin of 16% is predicted for 2020E. This is notably higher than competitors such as Amazon.com (AMZN). It is worth noting that Netflix isn’t a yielding equity, whereas some of their competitors, like Walt Disney Company (DIS) and Comcast Corporation (CMCSA) are.

After their report in July 2019, Netflix shares were down over 25% due to a slowdown in user growth across the board. They lost around 126,000 subscribers in the US, having predicted a gain of 352,000. The international subscriber growth declined a lot as well, at 2.38m new subscribers, falling short of expectations of 4.81m. However, shares recovered by 9% following an upturn is subscriber growth and better-than-expected profits in the third quarter to September 2019.

According to our internal analysis, Netflix will struggle to justify its valuation. Therefore, Hatchworks will not participate for now.

The Hatchscore is 4.4 out of 10. Full details can be found on Hatchnet: www.hatch-net.com/companies


What is Netflix?

Netflix specializes in subscription-based online viewing services for TV shows, films and documentaries. Members pay a monthly fee for access to unlimited on-demand content to their computers (PC and MAC), televisions, mobile phones or other devices (Xbox 360, PS3, Wii, Blu-Ray, etc.) connected to the internet.

Big Investors:

  • Capital Research & Management Co.
  • The Vanguard Group.
  • Fidelity Management & Research Co.
  • Black Rock.

Advisors and Bookrunners:

  • Merril Lynch & Company.

What are the risks?

  • Netflix is paying more and more to acquire new subscribers, but revenue and subscriber growth is slowing. If their efforts to attract and retain members are not successful, the business may be adversely affected.
  • A major concern right now is strong competitor growth; for example, Walt Disney Company (DIS) will be offering Disney+ streaming services from November 2019 for a cheaper price.
  • Privacy concerns could limit their ability to collect and leverage their membership data and disclosure of membership data could impact the business.
  • Netflix is still heavily reliant on licensed content, which drives the majority of the company’s viewing hours, despite big spending on original material.

Competitors:

  • Amazon.com (AMZN)
  • Walt Disney Company. (DIS)
  • Comcast Corporation (CMCSA)

Management team:

  • Reed Hastings: CEO
  • Jessica Neal: CTO
  • Rachel Whetstone: CCO

The Hatchwork Team

The forecast figures are based on the data of MarketScreener and not from Hatchworks: https://www.marketscreener.com/NETFLIX-44292425/?type_recherche=rapide&mots=Netflix


Legal Disclaimer — This report summary has been generated as a result of Hatchworks’ proprietary company vetting and filtering system. The level of due diligence conducted on investible assets conducted ranges from mediocre to significant, the latter being the case where Hatchworks has explicitly taken strategic positions in. By no means is the information in this file to be relied on as investment advice; this includes Hatchworks’ algorithmic composite score known as ‘Hatchscore’. Hatchworks has not received any compensation for this research. For more information you can reach us at info@hatchworksvc.com. This report is not for distribution in the United States of America. It is closed to U.S citizens. If you are a U.S. citizen, you should delete this report or return to sender.

Oto Suvari

Written by

Research & Development at Hatchworks & Neuchatel Ltd. Heading up the group’s R&D activities for Hatchworks, SPECTRE (www.spectre.ai) and linked projects.

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