Netflix Case

In: Business and Management

Submitted By Milo89
Words 1755
Pages 8
NETFLIX.COM, INC:
EXPECTED CASH FLOWS - 2000

NETFLIX.COM, INC:
EXPECTED CASH FLOWS - 2000

EXECUTIVE SUMMARY

Barry McCarthy, the chief financial officer of NetFlix.com, Inc. (NetFlix), has been asked by the company’s chairman and CEO, Reed Hastings, to re-evaluate NetFlix’s business model in preparation of its upcoming initial public offering (IPO). NASDAQ Composite Index has fallen 25% and many other internet companies have been forced to withdraw their IPOs. McCarthy needs to project future cash flows and determine if any changes to NetFlix’s business model need to be implemented. Analysts recommend the company proceed with its IPO once it can generate 12 months of positive cash flows.
RECOMMENDATIONS:
We recommend evaluating the company using a bottom up approach to project future cash flows. Our analysis method is as follows:

o Calculate the cost of acquiring and maintaining subscribers to construct an expected net present value (NPV) of each new subscriber.

o Determine the enterprise value of NetFlix.

o Apply the value of an individual subscriber to construct an aggregated cash flow projection. Determine when the cash flow stream is positive, providing an appropriate time for its IPO launch.

o Compare sensitivity analysis on expected cash flows due to changes related to the average amount of movies viewed per month, the shipping cost per disc, and the discount factor used to calculate the NPV on expected cash flows. Our analysis concludes that Netflix should wait until 2003 to launch its IPO based overall cash flow projections which show NetFlix will first generate positive cash flows in 2003 of $11,036.17, assuming all factors hold constant. However, if factors do not hold constant as demonstrated in our sensitivity analysis, NetFlix may generate positive cash flows sooner or later than…...

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