Financial Analysis Report: Netflix's Performance and Investment

This report provides a comprehensive financial analysis of Netflix, examining its business operations, market position, and investment potential. The analysis begins with a company overview, followed by a macroeconomic and industry analysis using PESTLE and Porter's Five Forces models, respectively. A competitive analysis is also conducted. The report then delves into Netflix's business strategy, corporate events, and financial performance, including ratio analysis and company valuation using a free cash flow model. The report concludes with investment recommendations based on the analysis. The report covers various aspects of the entertainment industry and provides a thorough understanding of Netflix's strengths, weaknesses, opportunities, and threats.

Running head: FINANCIAL STATEMENT ANALYSIS
Financial Statement Analysis
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Author’s Note

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FINANCIAL STATEMENT ANALYSIS
Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Company Overview and Analysis..........................................................................................2
Macroeconomic Analysis.......................................................................................................3
Industry Analysis...................................................................................................................6
Competitors Analysis.............................................................................................................7
Business Strategy and Model...............................................................................................10
Corporate Events..................................................................................................................11
Analysis of the Financial Performance................................................................................12
Ratio Analysis......................................................................................................................12
Company Valuation.............................................................................................................15
Free Cash Flow Model.........................................................................................................16
Conclusion................................................................................................................................17
Reference..................................................................................................................................18
Appendix..................................................................................................................................20

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Introduction
The main purpose of the assessment is to analyze the business of Netflix which is
engaged in entertainment service industry. The assessment would be considering the market
situation for the business and estimate whether the factors which are present in the market are
appropriate for the growth of the business. The analysis would be including PESTLE
Analysis and Porter’s five forces model for a better understanding of the factors which have
an impact on the operations of Netflix. The assessment would also be identifying critical
events which have taken place impacting the operations of Netflix. In order to review the
financial performance, ratio analysis and company valuation model would be applied for
better analysis. Finally, the assessment would be providing appropriate investment
recommendations for the business of Netflix considering all the factors affecting the
operations of the business.
Discussion
Company Overview and Analysis
The business of Netflix is a fast growing business which streamlines entertainment
and basically is an entertainment service provider. The application provides access to
different genre of movies, documentaries, serials. The company has access to 190 nations
getting a charge out of more than 125 million hours of TV which generates maximum portion
of revenue for the business (Netflixinvestor.com. 2020). The management of the company is
continuously trying to make improvements in the operational activities of the business by
improving the technological aspect of the business.
In terms of market strategy, the business of Netflix follows STP strategy which
involves Segmentation, Targeting and Positioning strategy for effectively attracting more
customers to the operations of the business. The management of Netflix is extremely alert for

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change in innovation and buyer contracts. As per 2015 data, it was estimated that more than
2.7 million Australian are using Netflix for watching any movies or series for the purpose of
entertainment. The management of Netflix considers different factors such as age, income,
geographic region, and watching preference for providing the best of services for the
customers (Netflix: Segmentation, Targeting & Positioning 2016). The company is trying to
expand its reach to customers which would help the business to earn more revenue from
operations of the business (Shih and Kaufman 2014). In terms of business segments, the
business is looking to expand the operations of the business further by targeting people on the
basis of age, preferences and customers.
Macroeconomic Analysis
Macroeconomic Analysis for a business is undertaken for the purpose of
understanding different factors which have an impact on the operations of a business. The
analysis would be showing PESTLE analysis for the business which is quite a useful
technique for taking appropriate decisions regarding the activities which needs to be
undertaken for the business for expanding the revenue which the business is able to generate
(Pant and Yu 2018). The different factors which impact the operations of Netflix are listed
below:
 Political factors: The political factors include impacts of government regulations and
intervention in day to day operations of a business. The business of Netflix operates
with a aim to digitalize different contents of movies, Tv shows and documentaries. In
some countries some contents are prohibited considering the laws and regulations
which are already implemented (Zalengera et al. 2014). It is an obvious fact that the
management of Netflix would not want to offend a population by streamlining a
certain content of work. One of the prime examples of political influence was the

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marketing of the TV series Narcos which offended the people of Colombia. This was
a reason that Netflix decided to reduce their efforts to promote the TV series.
 Economic Factors: The price at which the product or service is provided is an
important factor which affects the profits which is generated by the business. The
purchasing power of the consumers is also an important factor which needs to be
considered (McDonald and Smith-Rowsey 2016). In Netflix's case, the business
charges a different monthly fee based not only on the country's economy but also on
the nature of content which is shown in the application.
Figure 1: (Cost Comparison on the basis of Different Countries)
Source: (Netflix Inc 2019)

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 Social Factors: The social factors incudes the taste and preference of the targeted
customers of the business and this factor is considered to be important as this directly
impacts the decision making process of the business. Netflix streamlines TV contents
and movies for which it charges monthly or quarterly fees based on the subscription
requirements (Summers et al. 2016). The opinions of the customers who are
subscribing to the services needs to be positive and this can impact the operations.
 Technological Factors: The technological level in an industry is continuously
changing which has a direct impact on the activities of a business. It is important that
businesses needs to adapt to the changes which is taking place in the business. In the
case of Netflix, movies and shows are shown through online medium and therefore it
is imperative that advanced user interface is used for promoting efficiency in the
operations of the business. The use of social media is important in this age of
digitalization and the same is also important in the business of Netflix. In current
scenario, the business is using the most advanced technology for maintaining the
portal and also for providing the best experience to the users.
 Legal Factors: The legal factors include regulations and rights of the customers
which are applicable to the country. Netflix must ensure that they respect the regional
restrictions of certain shows or films so that it does not affect the population. In
addition to this, the business also needs to adhere to digital laws so that efficiency is
maintained in the operations of the business.
 Environmental Factors: This refers to the CSR responsibilities which the businesses
need to adhere to while providing services. The business of Netflix provides services
and therefore they are not depleting any form of natural resources. However, carbon is
produced when they are using electricity for running their servers. The company has
also taken step in this respect by installing wind turbines so that clean electricity can

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be generated. In 2019, the company has managed to change to 50% clean
electricity so it can be said that the business is trying to make the working
environment of the company sustainable.
Industry Analysis
Netflix is the leading streaming video company which has more than 130 million
subscribers. The application provides best TV shows, movies and series for the purpose of
entertainment and also generating revenue from the service. The business of Netflix was the
first pioneers in this industry which assisted the business to build a brand name for itself in
the market and also create competitive advantage which would help in generating appropriate
profits over the long run. The business is expected to grow at approximately USD 82 Billion
by 2023, at 17% of compound annual growth rate considering the current trends which is
available in the market. Some of the competitors which are present in the same industry are
Amazon, Hulu, HBO, Google which provides similar services. A graphical representation of
the viewership of Netflix and some of its rivals are mentioned below:

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Figure 2: (Netflix Viewership in USA)
Source: (Netflix Inc 2019)
The management of Netflix has appropriately expanded the operations of the business
so that appropriate revenue can be generated and competitive pressures can be handled
appropriately. The above graph shows that the business of Netflix dominates other business
operating in the industry in terms of viewership which is shown. In an overall analysis, it can
be said that the business of Netflix is in a favorable position in terms of competitive analysis
but further progress can be made.
Competitors Analysis
The business of Netflix operates in Streamline industry and conducts its operations to
provide the best possible services to the customers. The competitors for Netflix are Amazon,
Hulu, HBO, Google which have effectively established them in the market. The barrier to
entry in the industry is low and therefore businesses can enter the industry anytime. This
allows most of new businesses to enter the market for taking advantage of the favorable
conditions in the market. A proper competitive analysis for Netflix is shown below in a form
of table:

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Figure 3: (Competitors Analysis for Netflix)
Source: (Netflix Inc 2019)
Porter’s Five Force Model
 Bargaining Power of the Customers: The buyers have tremendously power in this
industry as they can easily leave Netflix without any consequence as there are lots of
options available to the customers (Muzumdar 2014). There are several other

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competitors present in the market which also means that the customers have lots of
options for the purpose of entertainment. In addition to this, the subscription price for
television is also quite low in comparison to Netflix which also makes the bargaining
power of the customers quite high.
 Bargaining power of Suppliers: The suppliers are few and have licensed contracts
with Netflix which makes their bargaining power quite high. In case a original show
becomes popular the rate of the supplier also increased which is a major factor which
needs to be considered for the purpose of analysis (Dälken 2014). In such a situation,
Netflix needs to negotiate with every supplier so that the business can get the best
possible price for the shows and also for streamlining the shows.
 Substitute Products: There are lots of substitutes available for the service of Netflix
as lot of businesses are entering the market and providing more or less the same
service which makes the influence of this factor quite high in the market. In addition
to this, the barrier to entry in the market is low which is one of the reason that lot of
option is available to the users. This can directly impact the operations of the business
and directly impact the revenue of the business.
 Rivalry: The rivalry in the market is quite high which directly impacts the revenue
which is generated by the business. The existing players always tend to bring about
improvements in their user interface so that more clients are attracted to the services
provided. The management of Netflix also needs to differentiate their products which
are often done by introducing original shows in their medium so that it can capture
more market. This is also a technique which is used by the business for generating
more revenue from the operations of the business.
 Threat of New Entrants: The threat of new entrant is also high as there is no barrier
to entry which can directly impact the operations of the business. However, some

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barrier needs to be considered such as technological barrier which can directly affect
the operations of the business and impact the revenue generation process of the
business.
Business Strategy and Model
The business strategy which is followed by the management of Netflix is to provide
appropriate services to the customers and expand the reach of the business so that more
customers can subscribe to the content. The focus of Netflix is on mass business sector so
that it can attain membership of TV appears and films expecting that it can expand the
operations and revenue with the prime number of endorsers. The management of the
company aims to enhance the operations of the business by getting more subscribers to the
services (Pfeifer and Conroy 2017). This would help the business to enhance the revenue
which is generated. The management of the company also aims to develop competitive
advantage by providing quality shows and also improving the technological level of the
interface. The business needs to frame strategies so that it can survive in the competitive
environment and further enhance the reputation of the business.

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Figure 4: (Netflix Penetration in different Markets)
Source: (Netflix Inc 2019)
The management of the company also aims to penetrate different markets and reach
out to as many customers as possible so that maximum revenue can be generated and the
business is able to spread its name on a global basis. The above table shows that the business
of Netflix has entered or penetrated different markets which are one of the reasons that the
company is so popular.
Corporate Events
The corporate events are events which can impact the operations of the business. The
events which are shown in the official website of the business reflect the different activities
which can impact the operations of the business. The website also shows quarterly earning
reports for the business so that the performance of the business can be monitored on a regular