Netflix Short Recommendation

See important notes, disclosures and disclaimers on page 26-29 before making investment decisions.
1

Levers:

On most multiples NFLX is over valued in our view as NFLX lags its peers in terms of margins.
We argue there is a difference between investment; allocating capital to assets and equity and allocating
capital to media options speculation. As Netflix does not provide usage transparency or churn stats investors have
little understanding of NFLXs content bets and the pay off as compared to acquiring library catalogue content. After all,
despite above peer average double digit revenue growth NFLXs profits are off roughly 70% from the 2011 peak.
Our contrarian view is NFLX is actually destroying long term shareholder value. We argue NFLX Originals
successes such as House of Cards and Orange are the New Black are not generating enough new subscriber additions
to offset Originals costs of underperformers such as Mako H20, Derek or Hemlock Grove. And until NFLX discloses the
unique viewers and churn reduction stats, our assumptions are just as valid as their unsubstantiated comments at Wall
Street and Hollywood movie conferences.
We like NFLX Documentary, and Indy Film projects but these are small tactical bets relative to House of Cards.
Indy films such as, The Square, are diminutive but it could be a better model for Netflix playing to skill set of the CCO.
The media calls what NFLX is doing money ball. In the absence of transparency, in our view, Netflix is drilling a
number of holes in the ground and not raising enough tents -investors were promised Lebron James, Dwayne Wade as
well as Chris Bosh and they are getting Paul Peirce, Kevin Garnett, and Jason Terry.
The risk associated with how NFLX buys media is cost management and development in our view; if NFLX fails
to take undeveloped committed Originals we think NFLX has a harder time attracting premier content.
We observe, based on the price NFLX pays for Originals and the truncated audience NFLX develops; NFLX
Originals may have a shorter half life then similar Originals on HBO or Showtime. For example, Arrested
Development is likely a one season Original but it cost roughly $37 million for just one season, maybe more.
We think a court ruling for Net Parody and against Net Neutrality can create opportunities for MVPD's just as
the court ruling creating retransmission consent fees created opportunities for Terrestrial Broadcasters. We
think fees from OTT service operators could one day represent 10% of MVPD revenue just as retrans fees comprise
10% of terrestrial operator revenue today. So why would CMCSA (NC) pay for NFLX?
If we exclude Breaking Bad (as much as a million subs by our estimate), House of Cards (3.6 million subs), and Orange
is the New Black (1.1 million subs) NFLXs failed Originals and organic business is actually losing subs which may be
why "The risk of U.S. market saturation only grows as we do," Netflix CEO Reed Hastings

GAAP EPS includes non-cash executive compensation under FASB 123R, sum of quarterly estimates may not add to annual due to rounding and shares differences
Thesis: If NFLX Faces Increased Competition for Content and Subscribers, If NFLX fails in its IP lawsuits with ROVI (NC), and also
raises more capital; we think NFLX shares could decline $100 (more or less) over the next six to twelve months.

Netflix As We Witness New NFLX Tactics, We See Good, and Bad for Shareholder Value; The Larger Concern For Investors, In
Our View, Is the Ticking Clock; Reiterate Under Weight and We Very Much Reiterate Our $122 Target

Albert Fried & Company, LLC
Institutional Reductive Research

Risks to Bear Thesis:
A strategic Industry Partner makes a tender offer for NFLX shares.
NFLXs Subscriber growth could accelerate to 10 million annually from 5 to 7 million annually.
NFLX could sell its DVD franchise at a premium AOCF 20x multiple and pay down its massive indebtedness.
A mass exodus of 50 million over 5 years cable subscribers could lower content costs while creating subs

Price Target
Our current target is the average of our Sum of the Parts, M&A and Intrinsic value price Target or $122 per
share. As our price target is very aggressive at over 200x earnings, we still think there are roughly $268 points
or 68% downside below the current market. If Reed Hasting is concerned about a bubble we think investors
should sell NFLX shares. We REITERATE our Underweight Rating.

NETFLIX Inc. NETFLIX Inc. NETFLIX Inc. NETFLIX Inc. NYSE: NFLX NYSE: NFLX NYSE: NFLX NYSE: NFLX

Rich Tullo
Director of Research
(212) 422 7282 x260
rtullo@albertfried.com
December 6, 2013
PRICE TARGET PRICE TARGET PRICE TARGET PRICE TARGET - -- - $122 $122 $122 $122
Previous Close 358.06
52 wk High/52 wk Low 389.16-54.34
Avg. Vol - 10 Day (mm) 3.021
Market Cap (mm) 21483.60
Shares Out. (mm) 60.0
Float % 87.0%
Shares Short (% Float) 18.3%
Dividend Yield % NA
PE 'CY17 87.3x
EV/AOCF '17 112x
Beta 1.06
2012A $3,609.3
2013E $4,306.4
2014E $4,342.4
2012A $0.29
1Q13A $0.05
2Q13A $0.49
3Q13E $0.53
4Q13E $0.58
2013E $1.65
2014E ($0.97)
Underweight
Estimates
Revenue (mm)
Earnings

See important notes, disclosures and disclaimers on page 26-29 before making investment decisions.2

While Smart, Small Ball May Signal NFLXs Big Originals Little if Any ROI in Our View
The Good, we actually think NFLXs renewed interest in documentaries and in mini series can work better for the
streaming model than long form Originals but perhaps not to scale in our view. We think, The Square about the Arab Spring is
a poor mans Kite Runner and The Short Game about over achieving Kids playing golf will work but work small because cute kids
always work on TV.
Our theory, movies based on graphic novels or video games are challenging because the comic book or 1
st
person POV video game
by their DNA are about creating universes (Metropolis in Bat Man or the battle field in Call of Duty). Books are based on a story
which is why we think a novel works better for the basis of a movie by comparison.
The Marvel mini series could work because audiences dont know about the Universe of Dare Devil like they know about the
Universe of Iron Man thus the mini series might be the best platform to introduce audiences to that Universe. But does that work if
Dare Devil is unmeasured? NFLX shareholders are potentially financing Dare Devil the eventual movie in cash terms and benefitting
Disney shareholders in CF terms if successful. We note to be a hit, Dare Devil will be expensive and NFLX will likely pay 2x as much
per hour for Dare Devil as it did for Orange is the New Black per hour. For Daredevil to work, Disney needs to deliver production
values at par with Iron Man. However we note, Marvel Series are not a lay up, as Disneys Agent of SHEILD has lost a little
audience despite great production values which speaks to the content bubble we are observing. We think consumers now have to
budget their time to get all this great TV in and to a degree the benefit to the consumer of time shifting is over.
The Bad, we remember weeks ago NFLX said it would introduce 6 to 18 new series in 2014.
When the CCO says they can run as many as 20 Originals, we assume Originals means incrementally 6 to 16 episodes
dramatic serial Originals such as The House of Cards -in other words; a programming slate equal to the CW. The Bull case is
NFLX will be the new HBO or even better. The reality by our observation is NFLX is tacking in different directions, using momentum
to find breeze but is the boat moving towards the rumb line? We think all hands are on deck because NFLX can not finance 12-20
originals and maybe not more programming hours then NFLX has currently bought and maintain an all you can eat movie catalogue.
The Seven, We think NFLX cant afford 20 originals because I) US Streaming audience is near saturation, II) the DVD market is
dying fast, III) We think International investment masks lower streaming margins in domestic, IV) NFLX has little FCF and much of
the cash generated over the last two quarters has been from stock options exercises, V) Accounting rules say NFLX cant push out
content expenses over 4 years, VI) Net Neutrality changes could kill NFLX and VII) NFLX is facing higher content costs because
NFLX harvested the low hanging fruit and now they need to develop content from a green field which is tougher then just out bidding
HBO for House of Cards. We think NFLXs big data servers do not have the core competency to think about art. NFLX does have
the competency to pick documentaries and Indy films because that is what Ted Sandros did when he ran a DVD rental store but
Indy films are a mole hill as compared to the mountains of Tibet.
To be clear, unless NFLX has the capacity to pay upfront the for NPV of a Blockbuster TV show like Sopranos or a movie
series like Hunger Games we think Hollywood will view NFLXs fixed price economics as a last resort and not as a first
choice. Our theory should be applied to TV as well as Movies because the value for content can be evergreen while NFLX as a
platform may be quasi annual. In our view syndication, DVD/Digital and the life time linear value of an Original are important. We
think if House of Cards offered producers upside beyond the $100 million NFLX would not be need a season III deal but, the
chances we see 13 episodes of House of Cards Season III or Orange is 20% or less.
Saturation

We think there is a reason why NFLX is now talking about international subscribers and cable collaboration as compared
to the 60 to 90 million domestic subscriber narratives from cord cutting it once talked about, is saturation.

To be clear, we think much of the 2013E NFLX subscriber gains were due to I) Churn reduction from House of Cards and
Orange is the New Black, and II) We believe Breaking Bad made Netflixs 3Q13A and this is an important distinction as compared
to the narratives we see on Blogs, CNBC, Fortune and the NY Times. In our view, the Media story lines sound like PR department
produced variations on Company produced talking points.

In our view, NFLX saturation has two fronts Content and Subscribers which are binge symbiotic (we dont like using
overhead jargon but as NFLX investing has trained fast money momentum driven short sellers on how to be fast money momentum
driven media investors here we are).

Albert Fried & Company, LLC Albert Fried & Company, LLC Albert Fried & Company, LLC Albert Fried & Company, LLC
Institutional Reductive Research Institutional Reductive Research Institutional Reductive Research Institutional Reductive Research

Chart I Selected Orginal MetaCritic Rating
Source: Metacritic and Albert Fried and Company LLC
0 10 20 30 40 50 60 70 80 90 100
Lilly Hammer
Hemlock Grove
Derek
True Blood
Family Tree
Homeland
Web Therapy
Nurse Jackie
Major Crimes
Bostons Finest
The Mentalist
Mad Men
The Killing
The Returned
Suits
Graceland
White Collar
Boss
Spartacus
Revenge
Resurrection
Hostages
Hostages
The Good Wife
Blacklist
Camp
SOA
Legit
Hatfields and McCoys
Alpha House
Crown
Luther

We think 55 and 4 million weekly views are the magic numbers deciding the fate of Dramatic Originals
is renewed
Albert Fried & Company, LL Albert Fried & Company, LL Albert Fried & Company, LL Albert Fried & Company, LLC C C C

MetaCritic and the Golden Age of TV (see Chart I on Prior Page)

While each individual TV critic may be wrong about a specific TV show we think in aggregate TV
critics accurately review shows. When critic data is weighted with user reviews, a blended score such
scores found on Meta Critic provide an accurate assessment for dramatic originals. It is unclear if the Meta
Critic system can be applied to more volatile and fragmented TV markets such as Comedy, Childrens, and
Reality TV in our view as popularity is at times uncorrelated with production values. For example, Duck
Dynasty is among the most popular TV shows and its Meta Critic score is 56 as compared to 99/100 for
Breaking Bad.

In 2013/14 over 15 terrestrial, cable TV, and streaming networks in the US and UK will produce more
than 100 Dramatic Originals excluding summer announced originals, situation comedies, childrens
and reality TV shows. Expanding to those market segments the total may surpass 300. We have said we are
in a new golden age of TV and the market for TV originals is frothy. Froth in our view is different from a bubble
in that bubbles burst for every asset but under a froth condition little bubbles boil off as the market cools.
Thus, we think there will always be a viable market for the best TV Originals but like all Golden ages, the
excess that created the Golden Age should quiet just like the Golden Age of Variety TV calmed, the Golden
Age for Game Shows chilled and the Golden Age of Situation Comedies cooled after Seinfeld.

The first season of Mad Men cost about $20 million to produce and we think season 6 will cost about
$42 million to produce, an 83% increase over 5 years. In addition to production budgets, AMC has spent
roughly $8 to $15 million annually marketing Mad Men. In our view, Mad Men while not AMCs most popular,
Original is a tent pole and largely started AMCs track record of success from 2008 to the present. Moreover,
Mad Men was among first Originals on basic cable to post ratings at par with Broadcast TV and Premium
Cable ratings.

Mad Men has a Metacritic score of 87 and has been nominated for more Emmy awards than all of
NFLXs originals combined. However with 4 to 6 million viewers today and far fewer in season two, if Mad
Men ran its first pilot today the terminal season would cost $70 to $90 million to produce based on the current
TV inflation rate. Despite its greatness, we think renewal would be a coin toss because Man Men only posted
about 1.8 million viewers (albeit high quality) in the first season. Thus today the cost of production is 50% to
more than 100% greater then it was in 2008 and we think the Metacritic quality bar has increased from the mid
40s to the high to low 60s and Nielsen viewership bar has increased from 1 million viewers to about 2 million.

Thus we think we are going to see more TV cancellations, write downs, and pressure in the TV
DVD/Syndication Market. For example, the popular comedy Modern Family entered the Syndication Market
and USA is paying about $13 million for the show. However, Modern Family is not producing the same ratings
as the old Law and Order originals in syndication it replaced. Thus USA is likely to have to make good on
Modern Family TV advertising. The issue in our view is two fold I) As Modern Family was widely available
OTT the viewership may have been diluted, and II) the market for Originals may be so fragmented currently
that its cannibalizing the lucrative syndication market with out regard to streaming. We note, Originals are high
risk high NPV but evergreen investments. Originals in first Golden Age such as I Love Lucy and the
Honeymooners made more in syndication in some years then they made on their entire first run. We note an
important distinction with NFLX is the Company does not own syndication rights on Original House of Cards or
Orange is the new Black thus NFLX shareholders are paying a lot for the Originals (maybe as much as 30%
more than a traditional network) but Orange is the New Black is an asset that belongs to Lions Gate and the
second round of cash flows belong to Lions Gate. However, if Orange is the New Black is an Original that
runs just two or three seasons no one benefits because a comparable Original the Weeds aired 7 seasons
and NFLX financed about 92% of the cost of production and after two or three seasons has to go back to
square one.

So our point is, the next vintage of Originals is larger than the vintage now currently attracting large
audience as new players such as WGN, The History Channel, A&E, Netflix, HULU, and Amazon are all
producing peer quality Originals. The Vikings (77), House of Cards (76), Betas (68), Alpha House (68),
and Wrongs Mans (90) and WGN (Tribune) will tent pole with the Ten Commandments. The Ten
Commandments is produced by Harvey Weinstein and should do well as The Bible on the History Channel
validated spiritual based originals and nearly matched the Walking Dead ratings despite a Metacritic rating of
44 for The Bible, which seems sinful. Moreover the BBC and PBS which essentially invented the Serial
Originals (Upstairs, Down Stairs) is importing strong content such as Orphan Black (73), Dontown Abbey (90),
and Crown (90). Thus it is not just the quantity but the quality which is expanding and now NFLX to remain
relevant will have to buy more and more originals in the streaming market because our studies and the studies
of GFK show third party Originals are just as it not more viewed than NFLX Originals.
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We think the increase in supply chould stress the TV content eco system as we think the limit of financing basic
cable and broad cast originals through increased TV affiliate fees is near its limit. TWC lost about 300,000 TV
subscribers and CHTR (MP, $150) has only grown its subscriber base in our view from broad band internet access. Thus
the money tree which is cable may be testing the price elasticity of the consumer and we thing the consumer is
responding by splicing the cable cord with is very unhealthy for the ecosystem.

Change does not equal progress and disruption is not always good for ecosystems. While the steam printing
press did enable the masses to read novels other advancements hurt ecosystems. A hundred years after the
steam printing press the screw propeller and smokeless gun powder driven harpoons nearly made whales extinct thus
technology disruption was not great for the Humpback Whales. More recently since the year 2001, NYT Times shares
are down roughly 65% as compared to a 40% positive performance for the S&P 500 as disruption on the Internet
impaired the Newspaper industry and NYT has out performed its peers. Thus we think Content producers have to view
this new age of digital streaming with open eyes. On one hand, the opportunity is great as technology can create new
revenue sources such as SVOD but also points of danger as content players could undermine large evergreen cash
generating franchises and the syndication market could be exterminated like the Humpback based on decisions made
today.

In the mid 2000s investors heard all the same arguments; digital revenue would surpass traditional revenue rich
60% gross digital margin and growth rates could be extrapolated over a generation. Today Newspapers are feudal
city states as compared to the empires that once were and so called capital optimization strategies in some cases made
matter worse not better as companies like Gannet levered up just as the newspaper industry went into a structural
decline at GCI they paid $1 billion for shares that trade for about $300 million.
Chart II Below

Sound familiar? (History does not repeat in our view its always in redux)

McLEAN, Va. Gannett Co., Inc. (NYSE: GCI) announced today that its Board of Directors has
authorized the repurchase of an additional $1 billion of its common stock. Prior to todays action, a substantial
Portion of the $500 million authorized for repurchase under the program announced October 26, 2004 had been used.

Douglas H. McCorkindale, chairman, president and CEO said, At current prices, we believe Gannetts
stock represents a very attractive investment opportunity.

In 2005 GCI shares were roughly 120% higher than they are today. In 2005 the WSJ wrote The nation's three largest
newspaper publishers are gearing up to sell advertising jointly on their newspapers' Web sites, believing their survival
depends on seizing new online revenue. We later argued as GCI gave content to Yahoo! and Google to drive online ad
sales giving content to aggregators at below the cost of production killed the News industry.

Today we think the disruption is rebranded but in many ways its the same. If CBS sells content to TWC (11 million subs,
$18 per sub) for $200 million and sell its most watched content to Streamers for $100 million (but they have 50 million
subs, $2 per sub) the numbers are far bigger but ultimately the potential to lose control of content economics is not much
different in our view.


Content,
We think the market for Original scripted programming is bifurcated. Originals such as the Walking Dead,
Homeland, and even House of Cards will command audience and superior economics for IP owners however new iconic
Originals will be tough to develop, in our view. We argue as production costs have escalated success now requires larger
audience to justify the expense. In short, at some point the law of diminishing marginal returns kicks in and we think the
point on time is sooner than expected for NFLX- sometime in 2014 as compared to sometime in 2016 as per Wall Streets
Consensus.

The Iconic Originals are the Originals in the top quartile of audience aggregation, reviews, and profits. We think
fewer Icons such as Breaking Bad will rise because the market for stream ready Originals is fragmented. In 2014,
over 20 networks ranging from Amazon to WGN and Crown will either enter or expand in the Original TV market.

Original scripted TV programs with audiences under 4 million for broadcast TV and about 1.8 million for a well
viewed Original on Cable populate the majority of the bell curve in our view. Thus an Original such as the Killing on
AMCX or We are Men on CBS (NC) are being cancelled with about 1.8 million and 5.4 million Nielsen Viewers
respectively. We think if the same standards of today were applied to Iconic Originals such as Breaking Bad Season in
2011 or Arrested Development in Season I these shows would have been cancelled after the third seasons and we may
witness NFLX cancellations too.

On streaming we think incremental NFLX Originals need to add about 700,000 to 100,000 subscribers each to
justify the cost at a roughly 3% churn rate. So as NFLX has added roughly 5 million subscribers over the last 12
months (Domestic and DVD) we think the Original TV business is actually weighing on shareholder value which may
make sense.

Netflixs net operating income yield (or NOPAT) is about 1% and its cost of debt capital is about 5%. So we argue
NFLX long term shareholder value may be getting destroyed because the only way to economically balance the cost of
Originals is a corresponding offset to shareholder value. While we understand the seemingly crazy argument we are
making, we think its NFLXs current high stock price with a very low earrings yield which is masking the equity value
destruction. We note in an era of programmatic news driven flash trading when combined with a limited float its easy to
see how shares can be irrational because computers, day traders and bloggers can be irrational especially when hedge
fund managers talk about NFLX earning $50 per share when NFLX is earning just $1 to $2 per share.

Our view has always been investment in Original programming can be good for Netflix but execution matters.
However, where we differ from the consensus view is every Original has to perform in similar ways to Orange is the New
Black or House of Cards because Netflix does lacks secondary revenue streams, VOD/DVD rights, and NFLX does not
generate advertising revenue. Yet NFLX has spent ample forward capital to acquire original programming, maybe as
much as $700 million annually by 2014E as NFLXs content liability (what it owes for content on an IOU basis) has
expanded to $6.5 billion from about $700 million in March 2011.
Table I Launch Date 2013E 2014E 2 Year Cost
1 Lilyhammer Season 2 Series Comedy-drama 13-Dec-13 34,000 34,000 68,000.00
2 Arrsted Development Series Comedy-drama 50,000 50,000.00
3 House of Cards Season 2 Series Political drama Feb-14 50,000 50,000 100,000.00
4 Hemlock Grove Season 2 Series Horror/thriller 2014 45,000 45,000 90,000.00
5 Orange Is The New Black Season 2 Series Comedy-drama Spring 2014 42,000 42,000 84,000.00
6 Mako Mermaids Season 2 Series Teen Drama TBA 15,000 15,000 30,000.00
7 Lilyhammer Season 3 Series Comedy-drama TBA 34,000 34,000 68,000.00
8 Turbo: F.A.S.T. Series Animation Dec-13 35,000 35,000 70,000.00
9 The Killing Series Crime drama TBA - 10,000 10,000.00
10 Marco Polo Series Drama 2014 - 75,000 75,000.00
11 Narcos Series Drama 2014 - 40,000 40,000.00
12 Sense8 Series Sci-fi-drama Late 2014 - 45,000 45,000.00
Total Expenses Analyst Case 305,000,000 425,000,000 730,000.00
Total Expenses Low End 657,000.00
Total Expenses High End 876,000.00
Gross Subs needed to generate shareholder value estimate Number of total requiered to generate shareholder value 8,402,615
Number of Net subs with 3% churn 8,077,108
Total Subs Added over TTM (Streaming and DVD) 5,059,000
Average Sub per Month 336,546
Sub per month 3% churn 326,450
Subs added ex HOC and O 359,000
Subs added excluding Breaking Bad, The Killing and The Walking Dead (641,000)
Sub Delt a (3,018,108)
Shareholder Value Destroyed (272,773,221)
Annual Subscription 95.88
Debt Cost of Cpaital 90.38
Sources: Albert Fried and Company LLC., Variety, and Company Data


We think NFLX is about 3 million subs short of creating shareholder value from its
Originals because the not all of its originals are performing like House of Cards. On Chart
I on the Prior Page, We think NFLX needs to ad about 326,000 subs per month to justify the
expense of its own Original Content. To be clear, we think the bulk of NFLX sub additions have
been due to the growth of time shifted viewing in general. TIVO revenue is up about 40% Y/Y,
at last discussion HULU subs are $4 million up 100% Y/Y, Amazon Prime subs according to the
Business insider surpassed 10 million in March 2013 and according to Rentrak VOD viewing
growth surpassed 40% in 2013. Thus the pie is expanding and NFLX is a large slice of the pie.
However, we think a number of items have been contributing to NFLX growth outside its
originals. We think The Walking Dead, House of Cards, and Breaking Bad made significant
contributions to NFLXs sub base. For example in the Quarter in which the final episode of
Breaking Bad posted on AMC in the US and NFLX in the UK NFLX posted 1.1 million in
domestic subscriber gains whereas in the Arrested Development Quarter NFLX only added
630,000 subs.

Like wise in the big 1Q quarter where NFLX added 3.6 million subs we attribute most of the
adds due to House of Cards but The Walking Dead, the introduction of XBOX streaming, and a
benefit from Tablet gifts during the holiday season could have ramped NFLX subs as well. In
our view and until we see hard data from NFLX we think the Company only added about
359,000 subs excluding the lift from House of Cards and Orange is the New Black. We also
think excluding the AMC content NFLX only added about 3.6 million subs and actually lost subs
if the lift from Orange is the New Black and House of Cards is excluded.

We think as the pie is growing and NFLX is spending more to generate sub growth at the
expense of long term shareholder value (in the absence of transparency). The miracle of the
NFLX turnaround could be based on just maybe dozen or so strategic pieces of content and
four of those pieces come from AMC.

We argue Netflix has spent and has committed to spend roughly $730 million through 2014 on
all originals and if our numbers are roughly right the failure of the other originals on NFLX (the
ones they dont talk about much) has in aggregate destroyed about $272 million in shareholder
value or $5 per share.

While we understand Netflix shares are up +$200 over the last twelve months, much of the
gains are speculative in our view. After all people paid $1500 for tulips at one time, and the Mo
Mo crowd paid $161 billion for the Old AOL in 1999. And at these bubbles, every investor could
have been as convicted as NFLX investors are today. However, the markets did not have Flash
Trading Algorithms marking up stocks $30 to $50 automatically on earnings prints as was the
case on 4Q12 earnings, 1Q13 earnings, and 2Q13 NFLX earnings.

Chart III


We think NFLX is one of the most highly levered Media Companies in the equity market
on a Liability to FCF basis. Netflix owes Originals and Movie Content rights holders $6.5
billion over the next five years and likely more as rights turnover.

Over the last twelve months NFLXs Free Cash Out Flow is $72 million which includes $71
million in cash flow generated by non-cash equity compensation. While some of NFLXs liability
is contingent, we think the $6.5 billion is NFLXs chief risk and competitive advantage. In our
view NFLX owes Hollywood $6.5 billion maybe more and over the last twelve months about $71
million in free cash out flowed from NFLX despite the addition of +5 million domestic
subscribers.

If NFLX opts not to acquire content NFLX loses content and therefore the advantage over
Streamers such as HULU, and Amazon Prime. Moreover, if the metrics by which these content
obligations are optionally priced work against NFLX, the content obligation expands. For
example, DIS (NC) just reported its global box office expanded to a record near $3.9 billion.
Due to the expansion we can assume NFLXs DIS content liability may expand beyond $330
million we now project. Moreover, as deals sunset, we can also expect renewal deals will
escalate. For example, we assume the $25 million annual minimum on the AMCX (MP, $77) /
NFLX which may expire next year is likely to escalate 100% or get scaled back. AMC struck the
deal when NFLX had less than 20 million subscribers and AMCs TV ratings were about of
what they are today. So why would AMC not bargain for a significant escalation. Its AMCs
stated goal to increased MPVD affiliate fees by 200% to 300% over time and we think the same
applies for OTT fees.
Chart IV
NFLX Enterprise Value Proforma Content
Source Albert Fried and Company and Company Reports
$1,135 , 4%
$6,500 , 22%
$500 , 2%
$21,400 , 72%
Cash
Content Liability
Debt
MCAP

Thus the NFLX enterprise value is really $6.5 billion greater then what the Bloomberg Service
(roughly $21 billion) because NFLX content obligations are excluded from the standard
calculation. However, NFLX has no franchise with no content thus we think the off and on
balance liabilities need to be included in the Enterprise value calculation like a pension would
be included in a car company EV. Thus equity investors today are paying real dollars for a
Company which has suppliers higher on the capital structure then even debt holders. So NFLX
is trading at roughly 16x book value but that book value is inflated because roughly $3 billion of
the NFLX content liabilities are off the balance sheet but 16x book is bubbly enough in or view
despite the accounting.

On a per subscriber basis using the profitable domestic subs and excluding the unprofitable
foreign subs. The NFLX enterprise value per subscriber (assuming the content liability does not
escalate) is $900 per subscriber which implies NFLX will retain each subscriber for about a
decade at $7.99. We think NFLX current churn is in the 3 million ball park down from 5 million.
High churn implies NFLXs subscriber lifetime ranges from two to five year range across bullish
and bearish assumptions. If we value NFLX on its current churn and life time subscribers we
think the shares are worth something closer to $130 as compared to the current price level and
we note prices in the $80 to $150 range post in virtually all of the devils advocating modeling
we do. Thus we think NFLX is potentially a bubble stock and a slow down in sub growth is the
likely catalyst to value rationalization.


In Our View HBO is a Business and NFLX is a Not for Profit

The big hedge funds that own NFLX say NFLX is the next HBO. We really dont agree because
HBO produces content and HBO owns content such as everybody loves Raymond, which never
aired on HBO, but HBO still collects syndication revenue from the show today. We also note
HBOs first success was Its Gary which it had a hand in production, where as NFLX is at an
arms length with Sony on House of Cards.

Ultimately NFLX can be a great company in many ways as its service is robust and popular but
as an investment -we urge caution. NFLX is plowing back revenue into content and now
International launches. In our view, NFLX is acting more like a not for profit rather than a
business. We think, the not for profit status of Netflix is sustainable only in the short term. As
Netflix adds subs it can pay for content consumed today with revenue from future subscribers
as long as it can capitalize content expenses and as long as subscribers grow fast. However,
we think as the market gets saturated NFLX will have to raise capital to finance operations
until it reorganizes its cost base. And on the ten year anniversary of Enron we think many of
the Hedge funds which say on TV that Netflix will earn $50 per share some day will balk at
writing a check for $1 billion to fund NFLXs. We know they balked at Ken in the final hour and
we think Reed Hastings is making a similar mistake to Ken Lay in equating share price gains
and losses to the success of NFLX as a business. In our view, stock moves are in part caused
by so called random walks (defined by Maurice Kendall in 1953) and shareholder value is
actually measurable using FCF to Equity Investors and the RIOC/WACC spread but as NFLX
refuses to provide usage data we think due diligence on the ROI of its Originals and
International expansions is a challenge.

We think NFLX has been fighting the subscriber growth saturation battle for the better part of a
year and we judge by its content liability escalating from roughly $700 million in 2011 to $6.5
billion today the cost to maintain growth at NFLX is getting more expensive by the year. While
the growth of content expenses has slowed we think NFLX content purchases are at the event
boundary.

We think NFLX is at budget cross roads. NFLX can I) cut content and hope to retain
subscribers, or ii) raise prices and hope to retain subscribers. However we think from a
strategic POV each action has a more than equal and opposite reaction.

If NFLX increases subscription prices its pretty clear in our view AMZN Prime, and HULU
benefit. Following a price increase SVODs can chose either to expand margins and follow the
price increase and have more capital for content , advertising, and Capex thus NFLXs price
increases helps the competition.

The SVOD could chose to gain market share and not follow NFLX prices. Thus HULU and
Amazon Prime will be in the market with $7.99 offers while Netflix is in the market with a $10
offer. Even if the price increase sticks we think NFLX subscriber additions slow and under
slower subscriber additions we think the $908 per Domestic streaming subscriber valuation
looks stretched under churn expansion. Basically the NFLX share price is suggesting to
investors that NFLX will either double subscribers over the next five years or retain its current
base over then next decade and we think that is a very aggressive assumption set. At the
current rate of subscriber growth (about 830,000 over the last two quarters) it will take NFLX
about 8 years to double its subscribers and longer in our view if NFLX increases the
subscription rate.


The Difference Among leveraged Media The Difference Among leveraged Media The Difference Among leveraged Media The Difference Among leveraged Media Businesses and a Businesses and a Businesses and a Businesses and a Not for Profit Not for Profit Not for Profit Not for Profit Enterprise Enterprise Enterprise Enterprise

While a value of $900 per $95.88 annual sub may sound reasonable we think NFLXs value
per sub is disconnected as compared to most media companies. For example, we cover AMCX
(MP, $77) and CHTR (MP, $150) and think both companies in certain respects are industry
leaders and while the shares of the CHTR and AMC are trading near 52 week high, we think
bubble is a term we fail to apply to AMC or Charter.

So can investors compare the value of an MPVD subscriber to a content network subscriber to
a SVOD subscriber? We think qualitatively you can even though the annual subscription for
Netflix is $95.88, the annual subscription for Charter is $1044 and the annual subscription for
AMCs networks is roughly $7. However we note this comparison is conservative because like
many media companies AMC and CHTR have multiple revenue sources such as commercial for
CHTR and ad revenue for AMC but as the subscriber is the core of leverage, we think
qualitatively the analysis makes sense at the end.

When we divide NFLXs enterprise value per subscriber (EVPS), including its $6.5 billion
content liability, by the annual subscription rate we get an EVPS/ Sub Price multiple of 9.5x
which we think is very high as compared to Charter which has $13 billion in debt and AMC
which has $2 billion in debt. The EVPS/SUB PX multiple for Charter is 2.5x and 2.9x for AMCX.
Thus we think NFLX is roughly 67% over valued as compared to premium media peers.
Moreover if NFLX shares were to trade at the same multiple as CHTR or AMCX, NFLX would
need to have much more than 100 million subs or a $28 per month subscriber fee at 30
million subs, or NFLX shares would be worth roughly $12.50 per share as the content liability
and debt are fixed and the over valuation on a relative basis would be drained via a decline in
equity value. We note the EV that would bring NFLX in line to CHTR and AMCX is in somewhat
in line to NFLX book value, about $17 per share.

We also think as NFLX valuation as expanded NFLX is now talking more and more about
International. The NFLX CEO Reed Hastings is a math professor and we think it is possible he
knows the only way to logically justify his share price to talk about international opportunities
which we think can drive higher subscriptions.

The problem with that argument in our view is most international markets are more highly
regulated then in the US and or have worse economics. Thus we would expect NFLX margins in
France with a 75% tax rate and greater content restrictions would be worse then in the US.

Table II

Value of Domestic Streaming Subs NFLX CHTR AMC
Domestic TV Subs in millions 30 11 311.7
EV Per Sub USD 692.2 2573 20
Adjusted EV Per Sub USD (EVPS) $909 $2,573 $20
EV/EBITDA (TTM) 93.7x 10.3x 12.2x
Estimated Annual Subscription Price $95.88 $1,044.00 $6.96
EVPS/Sub Multiple 9.5x 2.5x 2.9x
For AMCX we divided the CHTR Silver Play TV plan offer by 200 then adjust by 4 networks to derive monthly subscription rate
Source: Albert Fried and Company LLC.

Albert Fr Albert Fr Albert Fr Albert Fried & Company, LLC ied & Company, LLC ied & Company, LLC ied & Company, LLC

Standard Analysis validates our view that NFLX is Over Valued and a Bubble in our view.

On Capital IQ we ran a series of comparative screens to see how NFLX compares with a
number of Media Peers which touch TV Streaming and TV Content. We included disruptive
Internet companies such as GOOG (NC), and YAHOO (NC) owing to Yahoos exposure to video
news and pre roll revenue. We included content networks such as AMC and Starz (NC). And we
included conglomerates such as Disney (NC), Time Warner (TWX, NC) and Comcast (NC) and
lastly we included CBS (NC) which operates CBS and Showtime.

The most applicable comparable in our view is EV to Revenue. It is the most applicable
because EV makes companies more comparable from a capital structure perspective and
revenue is generally the cleanest metric companies report. Thus revenue from company to
company is less influence by differences in accounting methods.

On an EV to Revenue basis NFLX is about 100% overvalued as the NFLX EV/Revenue multiple
is 6.4x versus 3.5x from the peer group. We note YAHOO is the most expensive of the group
because the EV of Alibaba which is an equity investment inflates Yahoos share price and
Google is still growing fast and generating about $50 or more annually in adjusted earnings.

Netflix Comparative Analysis EV/Revenue
Source: Capital IQ and Albert Fried and Company LLC.
2.4x
4.1x
2.7x
2.7x
5.3x
2.3x
3.0x
2.6x
3.1x
3.3x
7.4x
3.5x
6.4x
0x 1x 2x 3x 4x 5x 6x 7x 8x
Amazon.com Inc. (NasdaqGS:AMZN)
AMC Networks Inc. (NasdaqGS:AMCX)
CBS Corporation (NYSE:CBS)
Comcast Corporation (NasdaqGS:CMCS.A)
Google Inc. (NasdaqGS:GOOG)
Starz (NasdaqGS:STRZ.A)
The Walt Disney Company (NYSE:DIS)
Time Warner Inc. (NYSE:TWX)
Twenty-First Century Fox, Inc. (NasdaqGS:FOXA)
Viacom, Inc. (NasdaqGS:VIAB)
Yahoo! Inc. (NasdaqGS:YHOO)
Mean
Netflix, Inc. (NasdaqGS:NFLX)

Using EV/ EBITDA as Using EV/ EBITDA as Using EV/ EBITDA as Using EV/ EBITDA as defined by capital IQ, NFLX is significantly over defined by capital IQ, NFLX is significantly over defined by capital IQ, NFLX is significantly over defined by capital IQ, NFLX is significantly over valued in our view valued in our view valued in our view valued in our view.

On an EV/EBITDA basis NFLX is trading at roughly 125x as compared to the 16x mean and 10x for HBO
the parent of HBO and 8x for Comcast.

EV to Ebitda as Defined
Source: Capital IQ and Albert fried and Company LLC.
54x
12x
11x
8x
17x
9x
11x
10x
13x
11x
17x
15.9x
125x
0x 20x 40x 60x 80x 100x 120x 140x
Twenty-First Century Fox, Inc.
(NasdaqGS:FOXA)
Mean


While Media folks from Ted Sarandros, to even John Malone say that NFLX is very pro While Media folks from Ted Sarandros, to even John Malone say that NFLX is very pro While Media folks from Ted Sarandros, to even John Malone say that NFLX is very pro While Media folks from Ted Sarandros, to even John Malone say that NFLX is very profitable fitable fitable fitable today; we today; we today; we today; we
as as as as compared to what? compared to what? compared to what? compared to what? A Banana Stand? A Banana Stand? A Banana Stand? A Banana Stand? In our view, a high earnings ratio suggests a company is not
very profitable on a relative basis.
P/Earnings
Source Capital IQ and Albert Fried and Company LLC.
17.2x
20.4x
20.8x
30.1x
13.9x
20.6x
16.8x
14.5x
16.4x
31.3x
20.2x
293.0x
0x 50x 100x 150x 200x 250x 300x 350x
(NasdaqGS:FOXA)
Mean


As NFLX still derives about 50% of its operating income from its high 40% segment As NFLX still derives about 50% of its operating income from its high 40% segment As NFLX still derives about 50% of its operating income from its high 40% segment As NFLX still derives about 50% of its operating income from its high 40% segment
margin DV margin DV margin DV margin DVD business is gross margin is in the ball park of the peer group and only D business is gross margin is in the ball park of the peer group and only D business is gross margin is in the ball park of the peer group and only D business is gross margin is in the ball park of the peer group and only
28% versus 48% for its peers 28% versus 48% for its peers 28% versus 48% for its peers 28% versus 48% for its peers - -- -s ss still well overvalued in our view.

Relative Gross Margin
26.6%
62.0%
42.5%
69.6%
57.3%
44.7%
21.2%
46.2%
35.9%
50.8%
70.1%
47.9%
28.4%
0% 10% 20% 30% 40% 50% 60% 70% 80%
(NasdaqGS:FOXA)
Mean


Most media companies have better EBITDA and FCF relative industrial companies because media
companies are acquisitive. Media companies generally create long term assets which can be expensed
in the near term but generate revenue over generations, such as the TV show Star Trek. Thus we expect
metrics which measure cash flow such as FCF and EBITDA to be higher then EPS alone due to non cash
expenses. However as we think NFLX is run more like a not for profit entity its model is upside down as
compared to its peers, in other words earnings are of low quality.

We think the low NFLX EBITDA validates that argument.

Relative EBITDA Margin
Source: Capital IQ and AlbertFried and Company LLC.
4.5%
34.2%
24.4%
33.1%
30.7%
24.8%
26.1%
27.0%
21.5%
30.3%
24.9%
25.6%
5.1%
0% 5% 10% 15% 20% 25% 30% 35% 40%
(NasdaqGS:FOXA)
Mean


Relative Net Income
0%
18%
12%
10%
22%
13%
14%
13%
21%
17%
27%
15%
2%
0% 5% 10% 15% 20% 25% 30%
(NasdaqGS:FOXA)
Mean


We think NFLX shares are a bubble because its growing faster than its peers. However at the
current valuation we think high growth multiples relative to peers is a double edged sword, its
supporting the stock market valuation currently but if growth slow the shares should revert to
the Mean industry EV/ Sales and or EV/EBITDA multiple. High valuation supported growth but
less earnings and EBITDA relative to NFLX in 2011 indicates a repeat of the 2011 down turn is
not off the table in our view.

We also note on a relative income basis AMZN is growing faster as is AMCX, FOXA (NC) and
TWC the parent of HBO. On sales basis GOOG, AMAZON, and FOXA are growing faster.

Relative Net Income Growth
Source: Capital IQ and Albert Fried and Company LLC
230%
79%
16%
8%
18%
8%
51%
129%
21%
44%
62%
0% 50% 100% 150% 200% 250%
(NasdaqGS:FOXA)
Mean


Revenue Growth
Source Capital IQ and Albert Fried and Company LLC
22%
15%
11%
3%
24%
9%
7%
2%
24%
10%
17%
0% 5% 10% 15% 20% 25% 30%
(NasdaqGS:FOXA)
Mean

Albert Fr Albert Fr Albert Fr Albert Fried & Company, LLC ied & Company, LLC ied & Company, LLC ied & Company, LLC

On On On On Valuation Valuation Valuation Valuation, , , , We think Probability We think Probability We think Probability We think Probability that that that that NFLX NFLX NFLX NFLX sh sh sh shares ares ares ares are are are are true true true true Stock Bubble is 88% to 95% Stock Bubble is 88% to 95% Stock Bubble is 88% to 95% Stock Bubble is 88% to 95%

We value NFLX using the average of our 2017 EV /AOCF (or EBITDA estimate ($80),

II) The valuation extrapolated by the HULU $750 million equity purchase by Fox, Disney, and Comcast
($127).

III) Our sum of the parts analysis where we apply a roughly 1x multiple on sales to NFLXs dying DVD
business which has lost 6.6 40% margin subscribers since September 2011, International Streaming
were we apply a 3x multiple.

We apply a roughly 2.5x multiple to NFLXs International franchise as its a business where nationality
matters despite a closer global community. We think its likely NFLXs International business will have
roughly 30% to 60% lower margins as compared to its US franchise due to higher content expenses and
increased data privacy regulations in countries such as the Netherlands and perhaps France.

We also note that International markets also require NFLX to incur additional costs to translate US
content into foreign languages and acquire local market foreign language content which NFLX may have
limited ability to leverage in the Domestic markets. Also in countries such as France there is a 4 year
block out on VOD movie viewing. We also note that in regions such as the EU and China taxes are a
major consideration France would like to collect a 75% marginal tax and in China NFLX would most likely
have to partner with one or more of the 1000 MVPDs which also operate streaming and DVD delivery
businesses. In China its government policy to expand broad band connections on its DOCIS 3.0 and PON
networks and we think its a challenge for any Company to come to the Chinese market and disrupt
MVPDs which are essentially utilities operated by local Communist Party Organizers.

Independently to our valuation we think Independently to our valuation we think Independently to our valuation we think Independently to our valuation we think NFLX is o NFLX is o NFLX is o NFLX is overpriced based on verpriced based on verpriced based on verpriced based on most metrics most metrics most metrics most metrics
Capital IQ has a tool which provides relative valuation analysis based on roughly 12 metrics from P/E to
P/Book. On Capital IQ, the mean across all multiples is $101. The high end of the range is $211 the low
end of the range is roughly $67 and our Target rests firmly in the Capital IQ range as its greater then the
mean.

We generally dont need to validate our analysis but as NFLX is speculative we have observed a number
of miss statements in the media which we think are somewhat inflammatory. An inflammatory
statement, to para phrase two analysts is NFLX is where its at and a TV reporter said just buy them
and bid them as an Americans we believe people have the right to free speech but SEC rules suggest
statements need to be supported by either numbers or logic and in our view buy em and bid em is not
a cogent analysis even though the media icon was right at the time.

A hedge fund trader recently said NFLX will make $30 to $50 per share without ascribing a date certain
or model by with NFLX will get to roughly 10 x earnings under real world scenarios. While his comments
are possible, we think his commentary suggesting the belief in NFLX as a so called wheel company a
thought prospered by a sell side peer. A wheel company is short hand in our definition of a virtuous cycle
meaning the driver of growth provides a catalyst for future growth. While virtuous cycles can exist; GM
from 1949 to 1970 may have been such a company as scale production fueled lower costs which fueled
demand. The cycle is in general temporary and rare; GOOG (NC) may be such a company today as
search quality improves with usage. However, we are big believers of Quantum Reflexive Pricing a theory
invented by George Soros which we think dominates markets over the medium term.

While we failed to appreciate the momentum behind what we think is a Reflexive bubble in NFLX shares
and while we could still be wrong, we think at this point NFLX shares exhibit traits of a positive feedback
loop. Soros says every bubble has two components: an underlying trend that prevails in reality and a
misconception relating to that trend. A boom-bust process is set in motion when a trend and a
misconception positively reinforce each other. The process is liable to be tested by negative feedback
along the way. If the trend is strong enough to survive the test, both the trend and the misconception will
be further reinforced. Eventually, market expectations become so far removed from reality that people
are forced to recognize that a misconception is involved. http://www.ft.com/intl/cms/s/2/dbc0e0c6-
bfe9-11de-aed2-00144feab49a.html#axzz2mcBcVBE3


Source: Google

Above is a Comparison of a Soros Reflexive Loop and a so called wheel. If Google is right about its Translate use case the more Google
Translate is used the better it gets. The difference between a true virtuous cycle and a reflexive bubble is the law diminishing marginal returns
applies to virtuous cycles. In reflexive cycles, we think natural cycles are distorted by the deployment of financial leverage to extend the virtuous
cycle beyond the natural point of diminishing marginal returns. We think as think the economic cost of capital rises and risk adjusted rates of
returns decline systems may collapse under its own leverage under reflexive scenarios.

For example in the Google case above, ability to improve a translation is relatively infinite and once the translation algo is perfected value is not
destroyed because the translation software can not get worse with use, just the marginal gains decline as it approaches perfection.

We think leverage is being added into the NFLX business mode. Leverage is manifested via its content liability which has expanded significantly
since 2011 but is dismissed by the Wall Street elite because so far NFLX has paid its bills. We note the same type of thinking ignored the credit
crisis until the day came when 3 million home owners stopped paying their mortgage.

In real term, NFLX generated about $72.5 million in cash losses ($1.29 per share) over the last twelve months on a FCF basis. We note NFLX
cash balance on the balance sheet expanded $149 million over the last year due to high non cash compensation expense, $54 million its debt
financing about $270 million net, and from stock options exercises, about $93 million. In the absence of these financial cash additions NFLX cash
balances would have declined $267 million or by roughly $4.76 per share.

So when does the bubble end? In our view when investors realize that this Company just added 5 million subscribers not at a net cost of $53 per
subscriber but at a cost of all the cash flow it would have earned from its existing 25 million subscribers plus $53 per subscriber. In 2011, FCF was
roughly $186 million so our point is sub growth is costing NFLX investors about $90 per incremental sub to add. We think the decline in FCF over
since 2011 represents the economic cost of growing subscribers in addition to the current cost.

We could be wrong, but the catalysts we see in undermining the feed back loop is a combination of slowing subscriber growth, and changes in
cost structure due to media inflation as the production cost of Originals is expanding and the quantity of high quality Originals is expanding as well.
We also think a secular change in Net Neutrality could be on the way. If NFLX has to compensate MVPDs to carry streaming services NFLX will
survive, but the equity value of NFLX shares under a new understanding of the business model could start a new negative feedback loop in our
view.


Net Neutrality Net Neutrality Net Neutrality Net Neutrality

Its not a Road to Damascus moment just acceptanc Its not a Road to Damascus moment just acceptanc Its not a Road to Damascus moment just acceptanc Its not a Road to Damascus moment just acceptance of a e of a e of a e of a potential potential potential potential unconstitutional court ruling. unconstitutional court ruling. unconstitutional court ruling. unconstitutional court ruling.
We think the FCCs rethinking of Net Neutrality and NFLX so called negotiations with CMCSA as well As TWC
according to media reports on Bloomberg suggests NFLX and the FCC are contingency planning for the end
of Net Neutrality. It has been reported on Bloomberg that the new FCC Chairmen, Tom Wheeler, appears to
have conflicting views on Net Neutrality. Well that makes sense to us because the courts may share his so
called conflicting news or better put the courts may be driving them.

Verizon (VZ, NC) is fighting Net Neutrality in the Washington DC courts and should have a ruling sometime
over the next 8 weeks provided the Obama Administration does not pack the court with judges and delay
the rulings. Following the recent abolition of filibustering in the US Senate we think new nominations could
change the status of the case. However, it is likely if the case is decided at the DC court the case will be
completed and not appealed at the Supreme Court level.

The DC court has a reputation for being business friendly. Based on the trial comments from the judges,
trade magazines such as Variety, Broadcast Cable, Light Reading and The Verge seem to think the court will
undermine 50% to 100% of Net Neutrality. Our objection to net neutrality has always been largely
emotional.

A) The US Government has the ability to shut down a website without due process
B) Net Neutrality does not apply to mobile IP networks
C) Recently CBS pulled its OTT streams to TWC cable customers and we view that new wrinkle as a flaw to
net neutrality. Anti discrimination should apply to MVPSs as well as IP services

We agree with John Malone the Chairmen of Liberty Media when told us The genius of Reed Hastings is
NFLX benefits form Net Neutrality because they have no cost of distribution According to Sandvine, a
broadband traffic services company, NFLX accounts for roughly 32% of US downstream internet traffic and
yet Netflix subscribers accounts for 11% of US internet users (254 million according to the ITU).

Our simple logic concludes all Internet users are subsidizing Netflix usage as MVPDs such as CVC (OW,
$19) and CHTR (MP, $150) are spending in excess of $1 billion annually to provide high speed broad band
networks. The consumer pays for the Netflix users because perhaps they would not need 15mbps -30 mbps
connections if NFLX users bore the cost of their usage relative to non users. In our view, NFLX is essentially
running a TV service from the servers operated by the MVPDs a least over the last mile.

Net Parody
We think the Net Neutrality Court Ruling could be as impactful as the 2006 ruling green lighting
retransmission fees. In our view owing to scale NFLX will carry the largest cost increase in a new net parody
world. We think the MVPDs will move to set limits on traffic levels distributed over their networks. Other
wise, the MVPDs will charge OTT services for excess band width consumed.

For example
We think there will a tier structure
Class I NYT.com no additional charge
Class II AMZN.COM (real tail) an additional charge
Class III OTT services Netflix and Pandora
If the Broadcasters are any measure, we think the MVPDs could generate 10% to 15% of their revenue from
OTT Parody at some point. Would that kill the Netflix?, not necessarily but segment margin will be under
pressure just as TV segment margins for MVPSs are under pressure today.

And the refusal to deal could put NFLX in the same position as TWC which lost 300,000 subscribers in due
to a retransmission fight with CBS. However under Net Parody, NFLX subs if blocked or slowed can just to
other options such as cable provided VOD, HULU, or Amazon. So we think NFLX will have to negotiate with
MVPDS not to expand subs but to maintain subs. This is one reason why we are not seeing US MVPDs
dealing with Netflix. Why would they pay NFLX today for exclusivity when NFLX will be paying everyone for
access perhaps in 2014.

Netflix, Inc. (NasdaqGS:NFLX) > My Netflix, Inc. Quick Comp > Quick Comparable Analysis > Financial Data
Details
Template: Capital IQ Default Comps
Currency: US Dollar
As-Of Date: Nov-26-2013
Company Comp Set
Company Name Day Close
Price Latest
Shares
Outstanding
Market
Capitalizatio
LTM Net Debt LTM Total
Pref. Equity
LTM Minority
Interest
Total
Enterprise
LTM Tangible
Book
LTM Filing
Date, Income
LTM Total
Revenue
LTM EBITDA LTM EBIT LTM Diluted
EPS Excl.
Amazon.com Inc. (NasdaqGS:AMZN) 376.64 457.7 172,400.9 (4,646.0) - - 167,754.9 14.09 Oct-25-2013 70,133.0 3,173.0 640.0 0.28
AMC Networks Inc. (NasdaqGS:AMCX) 64.06 72.3 4,630.3 1,674.3 - 0.69 6,305.3 ( 24.14) Nov-07-2013 1,523.3 520.3 455.9 3.72
CBS Corporation (NYSE:CBS) 58.47 600.1 35,090.8 6,080.0 - - 41,170.8 ( 8.91) Nov-06-2013 15,071.0 3,675.0 3,211.0 2.87
Comcast Corporation (NasdaqGS:CMCS.A) 49.91 2,615.4 129,633.8 40,790.0 - 1,269.0 171,692.8 ( 20.67) Oct-30-2013 63,668.0 21,066.0 13,210.0 2.4
Google Inc. (NasdaqGS:GOOG) 1,045.93 334.1 349,432.0 (47,599.0) - - 301,833.0 195.34 Oct-24-2013 57,386.0 17,599.0 13,813.0 34.7
Starz (NasdaqGS:STRZ.A) 27.37 113.1 3,091.1 1,033.2 - ( 6.26) 4,118.0 ( 3.39) Nov-06-2013 1,785.0 443.1 424.5 1.97
The Walt Disney Company (NYSE:DIS) 69.74 1,757.3 122,552.7 10,631.0 - 2,721.0 135,904.7 6.05 Nov-20-2013 45,041.0 11,742.0 9,550.0 3.38
Time Warner Inc. (NYSE:TWX) 66.63 904.7 60,281.7 17,596.0 - 1.0 77,878.7 ( 11.33) Nov-06-2013 29,394.0 7,927.0 7,040.0 3.96
Twenty-First Century Fox, Inc. (NasdaqGS:FOXA) 33.2 2,281.8 75,372.7 10,792.0 - 3,671.0 89,835.7 ( 3.32) Nov-06-2013 28,733.0 6,169.0 5,264.0 2.29
Viacom, Inc. (NasdaqGS:VIAB) 79.59 446.0 35,504.8 9,393.0 - 197.0 45,094.8 ( 13.72) Nov-14-2013 13,794.0 4,179.0 3,942.0 4.86
Yahoo! Inc. (NasdaqGS:YHOO) 36.29 1,014.4 36,814.1 (1,784.3) - 52.21 35,082.0 7.27 Nov-12-2013 4,760.4 1,186.8 678.3 1.16
Netflix, Inc. (NasdaqGS:NFLX) 350.24 59.3 20,754.5 (635.0) - - 26,619.5 ( 10.19) Oct-25-2013 4,144.6 213.2 165.7 1.2
Summary Statistics Day Close
Price Latest
Shares
Outstanding
Market
Capitalizatio
LTM Net Debt LTM Total
Pref. Equity
LTM Minority
Interest
Total
Enterprise
LTM Tangible
Book
LTM Filing
Date, Income
LTM Total
Revenue
LTM EBITDA LTM EBIT LTM Diluted
EPS Excl.
High 1,045.93 2,615.4 349,432.0 40,790.0 - 3,671.0 301,833.0 195.34 - 70,133.0 21,066.0 13,813.0 34.7
Low 27.37 72.3 3,091.1 (47,599.0) - ( 6.26) 4,118.0 ( 24.14) - 1,523.3 443.1 424.5 0.28
Mean 173.44 963.4 93,164.1 3,996.4 - 988.2 97,879.2 12.48 - 30,117.2 7,061.8 5,293.5 5.6
Median 64.06 600.1 60,281.7 6,080.0 - 124.6 77,878.7 ( 3.39) - 28,733.0 4,179.0 3,942.0 2.87

Source: Capital IQ


Details
Template: Capital IQ Default Comps
Currency: US Dollar
As-Of Date: Nov-26-2013
Company Comp Set
Company Name Total EBITDA EBIT Revenue EBITDA Basic EPS EPS (Capital Tangible
Netflix, Inc. (NasdaqGS:NFLX) 4,144.6 213.2 165.7 - - 1.26 - ( 10.19)
Edit Values Total
Enterprise
Pricing
Multiples

TEV/Total
Revenues
TEV/EBITDA TEV/EBIT TEV/Forward
Total
TEV/Forward
EBITDA
P/Diluted
EPS Before
Forward P/E
(Capital IQ)
P/TangBV
High 7.4x 54.3x 23.4x NM NM 31.3x NM 26.7x
Low 2.3x 8.2x 9.7x NM NM 13.9x NM 5.0x
Mean 3.5x 15.9x 14.6x NM NM 20.2x NM 12.2x
Median 3.0x 11.3x 13.2x NM NM 18.8x NM 8.4x
Implied Enterprise Value
High 30,543.7 11,574.0 3,869.5 NA NA
Low 9,561.5 1,744.2 1,607.3 NA NA
Mean 14,678.7 3,383.7 2,416.9 NA NA
Median 12,505.6 2,416.0 2,183.1 NA NA
+ Total Cash & ST Investments 1,135.0 1,135.0 1,135.0 1,135.0 1,135.0
- Total Debt 500.0 500.0 500.0 500.0 500.0
- Total Pref. Equity - - - - -
- Minority Interest - - - - -
= Implied Equity Value
High 31,178.7 12,208.9 4,504.5 NA NA 2,331.18 NA NA
Low 10,196.5 2,379.2 2,242.2 NA NA 1,033.88 NA NA
Mean 15,313.7 4,018.7 3,051.9 NA NA 1,504.29 NA NA
Median 13,140.6 3,050.9 2,818.1 NA NA 1,399.6 NA NA
/ Shares Outstanding 59.26 59.26 59.26 59.26 59.26 59.26 59.26 59.26
= Implied Price per Share
High 526.2 206.0 76.0 NA NA 39.34 NA NA
Low 172.1 40.1 37.8 NA NA 17.45 NA NA
Mean 258.4 67.8 51.5 NA NA 25.39 NA NA
Median 221.8 51.5 47.6 NA NA 23.62 NA NA
Mean Equity Value Across Multiples Equity Value Price Per
Share
High 12,555.83 211.88
Low 3,962.94 66.88
Mean 5,972.15 100.78
Median 5,102.32 86.1
Average 116.41
Source Capital IQ
All values in millions, except per share data and ratios.


MCAP in millions

Source Capital IQ,


Netflix, Inc. (NasdaqGS:NFLX) > Financials > Key Stats
In Millions of the trading currency, except per share
items. Currency: Trading Currency

Conversion: Today's Spot Rate
Order: Latest on Right Units: S&P Capital IQ (Default)
Decimals: Capital IQ (Default)
Key Financials 2010E 2011E 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
For the Fiscal Period Ending
Currency USD USD USD USD USD USD USD USD USD USD USD
Total Revenue 2,162.6 3,204.6 3609.3 4306.5 4342.4 4330.4 4577.2 4866.0 5027.2 4970.4 4721.8
Growth Over Prior Year 29.5% 48.2% 12.6% 19.3% 0.8% -0.3% 5.7% 6.3% 3.3% -1.1% -5.0%
Gross Profit 805.3 1,164.7 983.41 1271.1 1015.7 1196.1 1196.1 1706.5 1865.5 1893.7 1796.7
Margin % 37.2% 36.3% (15.6%) 29.3% (20.1%) 17.8% 0.0% 42.7% 9.3% 1.5% (5.1%)
AOCF I 412.4 429.5 (84.4) 103.2 (21.2) (347.0) 251.8 429.4 582.8 815.4 783.0
Margin % 19.1% 13.4% (2.3%) 2.4% (0.5%) (8.0%) 5.5% 8.8% 11.6% 16.4% 16.6%
Operating Income 283.6 385.1 50.0 207.0 -37.5 56.8 261.8 449.4 566.5 609.2 576.8
Margin % 13.1% 12.0% 1.4% 4.8% (0.9%) 1.3% 5.7% 9.2% 11.3% 12.3% 12.2%
Net Income 160.9 235.1 17.2 126.0 -59.2 -34.4 120.2 359.4 476.5 519.2 486.8
Margin % 7.4% 7.3% 0.5% 2.9% (1.4%) (0.8%) 2.6% 7.4% 9.5% 10.4% 10.3%
Diluted EPS Excl. Extra Items $2.96 $4.16 $0.29 $1.63 ($0.97) ($0.61) $1.48 $4.04 $4.80 $4.69 $3.98
Growth Over Prior Year 49.5% 40.5% (93.0%) 463.8% NM NM NM NM 18.9% (2.3%) (15.2%)
All results are taken from the most recently filed statement for each period. When there has been more than one, earlier filings can be viewed on the individual statement pages.
Growth rates for the LTM period are calculated against the LTM period ending 12 months before. 1000
Latest Capitalization (Millions of USD) 2010E 2011E 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Currency USD USD USD USD USD USD USD USD USD USD USD
Share Price as of Mar 28-2013 $189.0 $189.0 $189.0 $217.0 $80.0 $80.0 $80.0 $80.0 $80.0 $80.0 $80.0
Shares Out. 55.5 55.5 55.5 58.9 60.4 64.418 75.918 87.418 98.918 110.418 121.918
Market Capitalization** 10,498.1 10,498.1 10,498.1 12,782 4,829 5,153 6,073 6,993 7,913 8,833 9,753
- Cash & Short Term Investments 798 798 798 1850.7 1881.5 1462.2 1447.4 1391.8 1893.3 1822.5 2514.3
+ Total Debt 400 400 400 1400 1400 1400 1400 1400 1000 1000 800
+ Pref. Equity
+On Balance Sheet Liabilities 355.8 2,311.9 2,311.9 2,534.7 2,139.7 1,674.9 1,524.9 1,374.9 1,224.9 1,074.9 0
+Off Balance Sheet Liabilities 75 2300 4,923.0 2,079.0 1,679 1200 1800 2400 2600 2800 3000
+ Total Minority Interest
= Total Enterprise Value (TEV) 10,928.9 15,110.0 17,733.0 17,395.8 8,648.1 8,028.3 9,398.3 10,768.3 11,738.3 12,708.3 12,753.4
= Total Capital 1,116.8
Note: Striped area represents the impact of negative Net Liability on Market Cap.
Total Liability includes Total Debt, Minority Interest and Pref. Equity.
Net Liability includes Total Liability, net of Cash and Short Term Investments.
TEV includes Market Cap and Net Liability.
Total Capital includes Common Equity and Total Liability.
Valuation Multiples based on Latest Capitalization
For the Fiscal Period Ending
2010E 2011E 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
TEV/Total Revenue 5.1x 4.7x 4.9x 4.0x 2.0x 1.9x 2.1x 2.2x 2.3x 2.6x 2.7x
TEV/AOCF I 26.5x 35.2x -210.2x 168.5x -407.1x -23.1x 37.3x 25.1x 20.1x 15.6x 16.3x
TEV/Operating Income 38.5x 39.2x 354.7x 84.1x -230.6x 141.4x 35.9x 24.0x 20.7x 20.9x 22.1x
P/Diluted EPS Before Extra 63.9x 45.4x 652.5x 132.9x -82.1x -130.3x 54.0x 19.8x 16.7x 17.1x 20.1x


Analyst Certification

I, Richard R Tullo, hereby certify (1) that the views expressed in this report accurately reflect my personal views about any or
all of the subject securities or issuers referred to in this report and (2) no part of my compensation was, is or will be directly or
indirectly related to the specific recommendations or views expressed in this report.

About Ratings Transparency

Ratings for OVERWEIGHT AND UNDER WEIGHT rated securities are typically reviewed for a potential ratings and or price
target change when the market closing price is within 5% of the price target on initiation. The review process generally takes
1 to 20 days to complete however: market conditions, geopolitical events, industry regulations as well as other contingencies
may influence the timeliness of the review process. We have no obligation to tell you when opinions or information in Albert
Fried &Company LLC, research change apart from when we discontinue research on a subject company.

About Adjusted Operating Cash Flow (AOCF)

AOCF is a NON-GAAP measure of income similar to EBITDA (Earning before interest, taxes, depreciation and amortization
expense). We define AOCF as; operating income less depreciation, amortization and non-cash executive compensation. We
like AOCF as it provides a standard measure of earnings and value across a large spectrum of the Technology, Media and
Telecommunications universe we cover. As we cover securities which have significant non-cash costs and or significant
differences in capital structures, even within industry peers, we use Enterprise Value-to-AOCF (EBITDA) as a primary
valuation method in most of our coverage universe. We define Enterprise-Value (EV) as Market Capitalization less Cash,
plus Debt and we exclude minority interest as minority interest income and or expense is typically excluded from our AOCF
calculations. Moreover, in several Companies we follow options exist to PUT (Buy) Minority interest to the parent on
favorable terms which may or may not add value in an acquisition scenario. Companies we follow may, in Company reports,

Date 11/16/2012 01/17/2013 04/23/2013 09/19/2013
Rating Trade UW Underweight Underweight Underweight
Price $81.00 $97.27 $217.00 $307.00
Target None $68.00 $80.00 $122.00
1) Additional Information
Rating Action New Trading Re-Initiation None None
Target Action None Initiation Raise Raise
Report Type Trading Note Report Report Report


Research at Albert Fried & Company LLC Copyright 2012

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Guide to Albert Fried Fundamental Equity Research Rating System

Stock Rating

1) OVERWEIGHT suggests capital appreciation to our 12 to 18 Month Price Target of at least 30% from the price on the initiation or upgrade date of coverage.

2) MARKET PERFORM denotes less than 30% upside but greater than 10% upside to our 12 to 18 Month Price Target on the initiation or upgrade date of coverage.

3) UNDERWEIGHT suggests price appreciation of 10% or less from the price on the initiation or downgrade date of coverage over the next 12-18 month period

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Distribution of ratings system

Albert Fried & Company LLC provides fundamental research on 13 companies, of which 5 (38%) are rated OVERWEIGHT, 6 (53%) are rated Market Perform and 1 (7%) rated UNDERWEIGHT


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