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$24.29 1.35 (5.88%)
10/10/2008 4:00 PM

Netflix, Inc. (NFLX)

CAPS Rating:
***

The Company is a online movie rental subscriber which provides more than 6,300,000 subscribers access to a comprehensive library of more than 70,000 movie, television and other filmed entertainment titles on DVD.

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Recs

25

Avatar TMFInvestorpoet (94.24) Submitted: 6/21/06 5:25 AM : Outperform Start Price: $27.22 NFLX Score: 17.88

Netflix provides great service and good value. I believe that concerns over Video-on-Demand and digital downloads are overblown resulting in the stock trading a severe discount to intrinsic value. I used growth rates declining from 35% to 15% over the next ten years and a reversionary P/E of 22.5 (1.5 PEG), which results in an intrinsic value of $66 / share. This represents 42% of the intrinsic value.

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Avatar TMFEldrehad (99.99) Submitted: 6/23/06 12:00 AM

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Hey, quick question for you... what baseline did you use? 2005 net income? If so, did you back out the $34M or so tax benefit that came from prior year loss carry forwards? When I back this item out, I get a current trailing P/E of well over 170.

I don't see quite how declining growth rates from 35% to 15% justify that kind of trailing P/E.

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Avatar TMFInvestorpoet (94.24) Submitted: 9/09/06 7:48 PM

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I do need to add more commentary to my pitches. I just wanted to get something up on my initial CAPS picks.

For my baseline I start with $42 million in owner earnings. I add back $107 million in depreciation and amortization. So now I'm at $149 million in owner earnings.

As with most growing companies, I have to figure out how to handle the capital expenditures. Netflix had $31 million in capital expenditures, but $114 million in DVD library purchases. How much of this is maintenance and how much is growth. My assumption is 60% of library purchases are maintenance. By this I mean purchases of newly issued DVDs for existing subscribers and replacing damaged DVDs. 40% is to account for new subscribers and building the library to support subscriber additions.

So from the $149 million in owner earnings prior to capex, I subtract $99 million in capex, resulting in a $50 million baseline.

By this same measure, Netflix has produced $33 mllion in owner earnings in the first two quarters. So much is being invested in growth both above and below the net income line. I believe this obscures how much cash this business model produces.

One other thing my post excludes is the discount rate. I used 10%.

Here are my ten years of owner earnings:
1: $68 million
2: $91
3: $118
4: $152
5: $189
6: $231
7: $272
8: $322
9: $370
10:$426

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