ACaseStudy NetflixInc. LinkingOperationalLiquidityandStockPrices

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A Case Study: Netﬂix Inc. - Linking Operational Liquidity and Stock Prices
Preprint · November 2017

DOI: 10.13140/RG.2.2.13274.80326
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ADMS 4541A – Applied Corporate Finance Fall 2018
Professor: Dr. Yogendra Prasad Acharya
Group 6: Research Project
Members:
Alexandra Faye Steinberg*
Yuhong Wu
Kai Lin
Jiajun Li
Xingyin Chen
Topic: A Case Study: Netflix Inc. - Linking Operational Liquidity and Stock Prices
Due Date: November 28, 2018

Table of Contents
Abstract--------------------------------------------------------------------------------------------------------------------1
Research Question-------------------------------------------------------------------------------------------------------1
Research Interest------------------------------------------------------------------------------------------------------1-2
Previous Knowledge--------------------------------------------------------------------------------------------------2-3
Expert Knowledge-----------------------------------------------------------------------------------------------------3-4
Hunches and Expectations----------------------------------------------------------------------------------------------5
Participants----------------------------------------------------------------------------------------------------------------5
Study Location-----------------------------------------------------------------------------------------------------------5
What Did We Try Out?-------------------------------------------------------------------------------------------------6
How Did the Action Unfold------------------------------------------------------------------------------------------6-7
What Changes Occurred/What Did We Learn?----------------------------------------------------------------------8
How Did We Record Observations?----------------------------------------------------------------------------------9
What Did We Observe?---------------------------------------------------------------------------------------------9-42
i. Quarterly Operational Liquidity---------------------------------------------------------------------9-13
ii. Netflix: Monthly Stock Prices: Rates of Return-------------------------------------------------14-19
iii. NASDAQ (Market Proxy) Prices: Rates of Return---------------------------------------------20-25
iv. Correlation Between Operational Liquidity and Rates of Return-----------------------------26-28
v. Correlation Between NASDAQ and Netflix Rates of Return---------------------------------29-42
Qualitative Analysis: Examination of Double-Blind Peer Reviewed Journals-----------------------------43-47
i. Trade Credit: Theories and Evidence-------------------------------------------------------------43-45
ii. “Liquidity- profitability trade-off: An empirical investigation in an emerging market”---46-47
Conclusion---------------------------------------------------------------------------------------------------------------48
Appendix A: Original Quarterly Financial Statements--------------------------------------------------------49-54
Appendix B: Meeting Minutes-----------------------------------------------------------------------------------55-61
References-----------------------------------------------------------------------------------------------------------62-63
1. Abstract
Five undergraduate finance students have conducted an applied analytic desk research study to bridge
the gap between quantitative data and recent investor concerns regarding the relationship between
operational liquidity and firm profitability for Netflix Inc. Through a regression analysis from December
1, 2013 to November 1, 2018 of both Netflix Inc.’s cash conversion cycle and NASDAQ Composite’s
monthly rate of returns, we have been generally unable to establish a statistically significant relationship
between these factors to Netflix’s rate of return. Consequently, through qualitative research analysis, we
have suggested that Netflix differs from traditional large firms and many financial fundamental theories
regarding the relationship between short-term financing and profitability are surprisingly inapplicable to
Netflix Inc. Finally, we have suggested various directions that subsequent research can take to further
explore any potential variables that may affect Netflix’s stock prices, rate of return and market
capitalization.
2. Research Question
In the following desk research project, our group will examine the following question: “With
specific reference to financial statements and stock prices from January 2014 to October 2018, how can
Netflix Inc. improve its trade credit terms with suppliers to increase its firm value and stabilize its stock
price?”
2.1 What is Our Research Interest?

Through our case presentation on “Analysis of Capital Management”, group 6 has become well
versed in the efficiency of short-term operating assets and liabilities. Consequently, as knowledge often
leads to interest, we have selected this particular area of short-term financial management for our research
project. Furthermore, as solvency ignores a firm’s going concern, we will narrow the scope of our
investigation to operational liquidity. The relevant measures are the cash conversion cycle (CCC),
operating cycle, days inventory held (DIH), days sales outstanding (DSO), and days payables outstanding
(DPO). The operating cycle reflects the typical number of days required to move inventory to credit sales
(DIH) and then, receivables to cash (DSO) (Zietlow, Hill, Maness, 2017, 33). CCC denotes the operating
cycle but considers the days required to pay off outstanding payables (Zietlow, Hill, Maness, 2017, 33).
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Notably, these operational liquidity measures are affected by changes in trade credit terms (with both the
customer and supplier) and inventory management (Zietlow, Hill, Maness, 2017, 39).
We selected Netflix Inc. as our case study as it is an area of both personal and academic interest.
Personally, one of our group members is a shareholder of Netflix Inc., others are avid Netflix subscribers,
some simply hold a fascination with tech stocks, and many wonder about a potential dot-com-like-tech
micro bubble. Furthermore, many group members are originally from China which offers IQiyi - another
online video platform - with more subscribers than Netflix (Cherney, 2018,1). IQiyi has been heralded as
a potential threat to Netflix’s ability to expand its market share (Cherney, 2018,1). With IQiyi, HBO,
CBS, Amazon, Vudu, Hulu, Comcast and even Disney on its tail (Moskowitz, 2018,1), attempting to
dominate the online video content streaming sphere, Netflix’s ability to sustain its position in an
increasingly competitive market is worth investigating.
2.2 What Do We Already Know?
Netflix was launched in 1997 as a DVD-by-mail service (McDonald, McDonald & Smith-
Rowsey, 2016). Today, it allows its subscribers to stream videos through a content delivery network
(CDN), which is comprised of a nationwide server network that interconnects ISP network-operated
broadbands (McDonald, McDonald & Smith-Rowsey, 2016). In peak seasons, thirty percent of all US
residential internet traffic was generated by Netflix (McDonald, McDonald & Smith-Rowsey, 2016).
Furthermore, in 2000 to 2017, the total number of American cable or satellite television subscribers
dropped from 69 million to 49 million (Wayne, 2017). On the other hand, between 2015 and 2016, online
streaming services increased their number of original scripted television series from 46 to 93 (Wayne,
2017). Therefore, the fall in cable viewership has been attributed to the increasing popularity of
subscription video-on-demand (Wayne, 2017). By 2018’s third quarter, Netflix has over 137 million
streaming subscribers worldwide (Disis, 2018).
Nevertheless, in the past two quarters, Netflix – once deemed a stable member of the FAANG
stock group – has experienced unprecedented volatility in its stock price: in 52 weeks, Netflix has had a
high of 423.21 USS and a low of 178.38 USD, which is exceptional variability for a stock with a monthly
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beta of 1.16 over three years, reflecting near market movements (Netflix Key Statistics, 2018).
Additionally, as of October 16, 2018, Netflix has released its financial statements for the third quarter
(Netflix, 2018), which caused a steep spike and then fall in its stock prices (Yahoo Finance, 2018).
Through academia, we understand the effect of the cash conversion cycle on operational liquidity
and firm value: a small cash conversion cycle typically improves the firm’s market value. Furthermore,
we understand the financial economics theory of Eugene Fama’s efficient market hypothesis (EMH).
There are currently three forms of EMH: weak, semi-strong, and strong form. Proponents of the weak
form EMH believe that the prices of all publicly traded assets reflect all past publicly available
information. Semi-strong EMH proponents believe that the prices of all publicly traded assets reflect not
simply past publicly available information, but also an instant incorporation of new public information.
Finally, strong form proponents believe that publicly traded asset prices instantaneously reflect all past
and present publicly available information, as well as, insider information. In brief, EMH asserts that one
cannot “beat the market” consistently, as the market prices already reflect new information. As non-
insiders, there is no way for us to conclusively determine the effects of insider information on current
stock prices. Consequently, the group will commit to a semi-strong stance on EMH: our research will
examine Netflix Inc.’s publicly released financial statements from January 1, 2014 to October 1, 2018 to
attempt to establish a connection between the cash conversion cycle and stock prices and outline any
other significant causes of stock price variations.
2.3 What do others know?
In the past two quarters, experts have polarizing positions on Netflix Inc.’s financial situation. For
example, from the bullish perspective, RBC Capital Markets’ lead internet Analyst Mark Mahaney claims
that the company posted strong third quarter results, surpassed estimates, has added nearly 7 million new
subscribers, and consequently, the stock price will “double in the next three years” (Clifford, 2018, p1).
Furthermore, other bullish investors have focused on Netflix’s ability to finally push HBO off of its 16-
year position at the top of the Emmy pedestal, which reflects an investment focus on “high-quality
content and high-quality award campaigns” (Walters, 2018, 1).
3
On the other hand, bearish investors believe that Netflix’s previous $400 per share valuation was
overpriced and the aggressive momentum (MOMO) crowd that typically buys popular technology stocks
have dramatically changed their stance (Arora, 2018, 1). These investors believe that Netflix prices were
inflated by investors’ holding a disproportionately optimistic stance and tunnel vision regarding the
company’s valuation and its potential (Arora, 2018, 1). Many bearish analysts pinpoint Netflix’s problem
to one of cash flow, as it had a free cash flow of $1.7 billion outflow, which is finally beginning to have
an overall negative effect on the company’s financial statements (Sozzi, 2018, 1). This view is
substantiated by Bloomberg data’s inability to see Netflix turning cash flow positive within the next four
years (Sozzi, 2018, 1). Its inflated stock valuation was based on analysts ignoring its cash burn rate and
free cash flow and focusing on its subscriber growth potential (Sozzi, 2018, 1). Consequently, the risks
that investors ignored in 2017 persist today; however, the erosion of high and unwavering conviction in
Netflix has caused the stock price to finally reflect its volatility (Adams, 2018, 1).
Other speculators simply blame the market, as all the technology stocks were directly hit
following the US Treasury’s ruling that allowed the Committee on Foreign Investment in the US (CFIU)
a mandate to review foreign investment in US companies on national security grounds (Adams, 2018, 1).
This mandate was followed by a month-long bond sell-off, which caused yields to rise to 3.26%, their
highest since April 2011. (Adams, 2018, 1) Finally, heightened tensions and retaliatory trade restrictions
between US-China are adding increased uncertainty to global markets, particularly the trade sector
(Kunert, 2018, 1).
As the firm’s liquidity is easier to control than external factors, such as the nation’s trade
etiquette, in response to this problem, our study proposes to analyze Netflix Inc.’s short-term operational
liquidity and its potential areas of improvement.
4
2.4 What Are Our Hunches? What Did We Expect to Find?
First, as a CDN, we suspect that Netflix Inc. will have negligible physical inventory. Second, due
to its monthly direct debit subscription format, we also suspect that the company will have negligible
credit sales. Consequently, we believe that Netflix’s operational liquidity will be highly dependent on its
ability to pay its suppliers. Furthermore, due to Netflix Inc.’s notorious cash flow problems, we
hypothesize that changes to its trade credit terms with suppliers will have a significant effect on its market
capitalization as reflected in its stock prices.
3.What did We Try out to Improve Our Practice? What Problems Arose?
How did we Respond?
3.1 Who are the participants?

As a desk research project, the active participants in this study are simply the undergraduate
finance students at York University’s ADMS 4541A “Applied Corporate Finance” Fall 2018’s Group 6 –
Alexandra Faye Steinberg, Yuhong Wu, Kai Lin, Jiajun Li, and Xingyin Chen - and the course supervisor
– Dr. Yogendra Prasad Acharya - who are involved in a feedback loop to ensure the quality and integrity
of the data and analysis.
3.2Where did the study take place?
For face to face interactions, group members met in four primary locations at York University:
our lecture hall in room 034 of the Health, Nursing, and Environmental Studies (HNE) building, the Scott
Library, the Peter F. Bronfman Library, and the New Student Centre. For non-face to face interactions,
the group’s communication was assisted through the use of e-collaboration tools, such as Facebook
messenger, Google Docs, and WhatsApp that enabled group members to edit, upload and interact at any
location and any time at their convenience. The seven in-person group meeting details – agenda, decisions
made, assignments, and issues - can be seen in Appendix B.
5
3.3What Did We Try Out?
We executed an applied desk research project to attempt to determine the current effectiveness of
Netflix Inc.’s operational liquidity on stock prices and ways to improve uncertainty in management
decision-making. For business research, there are three primary methodological views: the analytical
view, the systems view and the actors view (Arbnor & Bjerke, 2009, 19). As we are conducting a desk
research project, we have selected the analytical view as the most appropriate method of bridging
scientific methodological views to our financial problem area and research question. The analytical
view’s primary underlying assumption is that reality is factive, regardless of the whether or not the facts
are objective or subjective in nature (Arbnor & Bjerke, 2009, 81). Through this approach, we are tasked
with discovering elements that are invariant despite environmental variations in perceptions among
different individuals (Arbnor & Bjerke, 2009, 81). Therefore, that which is invariant is “true” (Arbnor &
Bjerke, 2009, 81). The two primary questions are: which are the facts and how can we explain these
facts? Therefore, this view primarily uses quantitative modelling to demonstrate correlations and
causations to prove or disprove the hypothesis (Arbnor & Bjerke, 2009, 81). As causation is statistically
nearly impossible to prove, we will be limiting our research to establishing a correlation between
operational liquidity components and stock prices.
3.4How Did the Action Unfold?
The action unfolded in a way that was consistent with an applied quantitative desk
research project with an analytical view. First, we identified the problem and statement of our research
objectives (as outlined above). Second, we created a research design according to the specifications
detailed by our supervisor. Third, we chose a method of research (exploratory with a heavy reliance on
secondary data) and sampling procedure. These first three steps were then detailed in a research proposal
that was given to our supervisor. Following Dr. Acharya’s feedback, we amended our initial research
proposal to include his modifications. Subsequently, we collected all relevant quantitative data: all Netflix
Inc’s financial statements from January 2014 to October 2018 (present) and monthly stock prices from
December 1, 2013 to November 1, 2018. Through this collection of data, we analyzed the data both
6
quantitatively and qualitatively. From a quantitative perspective, with specific reference to the published
income sheets and balance sheets, the quarterly cash conversion cycles were calculated. With specific
reference to the monthly stock prices, the monthly rate of return, average rate of return, annual rate of
return, monthly variance, monthly standard deviation, average monthly standard deviation, and annual
standard deviation were calculated. Using, the Excel Solver function, we then analyzed our findings
through regression and sensitivity analysis to establish a relationship between the independent variable –
cash conversion cycle (a proxy of operational liquidity) – and the dependent variables - stock price rate of
returns and standard deviation (a proxy of market capitalization and risk). From there, we will compare
the operational liquidity metric to industry benchmarks and our stock price returns and volatility to
NASDAQ (used as a market proxy). If our model holds, we will employ scenario analysis to examine the
effects of changes to trade credit policies on the cash conversion cycle. From a qualitative perspective,
we used double blind peer reviewed journal articles to substantiate our findings and suggest potential
improvements that can be a stepping stone for further research. First, Mehra and Prescotts’s equity
premium puzzle results over a 110-year period– inflation-adjusted rate of return and standard deviation –
will be used as a point of reference for our quantitative analysis. Second, Mitchell A. Peterson and
Raghuram G. Rajan’s paper on “Trade Credit: Theories and Evidence” will be used to attempt to explain
why firms employ non-financial borrowing through suppliers. Third, Abuzar Eljelly’s article “Liquidity –
Profitability Tradeoff: An empirical investigation in an emerging market” will be employed to analyse our
methodology and compare our results to other studies relating profitability to operational liquidity.
Our final step of analysis will be to examine potential rival causes to Netflix’s stock price
volatility. Throughout the project, all group members will individually and collaboratively review all
elements of our final research project report and attempt to address and dispel any pre-existing underlying
value and reality assumptions that risk imposing bias on our methodology and results. Finally, we wrote
up and presented our final report of our project and await Dr. Acharya’s feedback.
7
3.5What Changes Occurred in Our Plans as a Result of What We Learned?
Our initial project proposal – before submission – was far too wide of a scope. Consequently, we
reduced our operational liquidity metric to simply the cash conversion cycle to present a clear focus and
research path. Through e-mail and in person correspondence with our supervisor, we were provided with
additional guidance regarding our project’s direction and proper formulation of our research question.
Once we received our formal proposal feedback from Dr. Acharya, the primary recommendations
included the specification of our secondary data timeline in our research question and formatting changes,
which were immediately implemented. Once we began our collection, we had moments of disaccord in
regard to each quarter’s respective accounting period. This issue was swiftly resolved through an
unbiased method where each student presented his/her opinion and reasoning and the matter was simply
put to a democratic vote. Due to the odd-numbered nature of our group, voting seemed like a fair and
practical method of resolving inevitable disagreements. Finally, upon the regression analysis of our
results, our model of the cash conversion cycle and the monthly rates of return could not be statistically
inferred. Consequently, we deemed it ineffective to attempt to conduct a scenario analysis as according to
our results, changes in trade credit terms would not affect Netflix Inc.’s stock prices for the period from
January 2014 to November 2018. Through these changes, we learned not just formal research
methodologies, but also variables that affect group dynamics and professionalism, which can be applied
to subsequent collaborative research work.
8
4.Observations and Analysis
4.1 How Did We Record Observations?
Our observation recordings are clear through our “Group Meetings”, as seen in Appendix B. Each
student was initially tasked with a year. Within this year, through our previously agreed upon sources,
methodology, techniques and tools, each student collected and analyzed the data in a consistent manner.
Each set of data analysis was then saved separate documents per year: in both its original (raw) format
and analyzed form. Upon completion by the established due date, the group members then met to review
each document for integrity of research and analysis. The post-review documents of both raw data and
analysis were saved. Subsequently, during the group meeting, in a separate document, we integrated the
data as a group to ensure that there was no individual bias or dominant perspective influencing our results.
Consequently, all observations were recorded on Word Documents and Excel Spreadsheets. They were
then incorporated into this report. Our original data is presented in Appendix A and our analytics will be
presented in tables preceding their respective write-ups throughout the course of this paper.
4.2 What Did We Observe?
i. Quarterly Operational Liquidity
First, with specific reference to the quarterly balance sheets (Appendix A), we immediately
noticed that our initial hunch of a negligent inventory and credit sales account were actually
overestimations. In reality, the balance sheets reflected inventory and credit sales of $0.00, consistently
over the course of our five years of study. Consequently, our quarterly days in inventory held (DIH), days
sales outstanding (DSO) and operating cycle (OC) were zero days. Therefore, our operational liquidity
measure (cash conversion cycle (CCC)) was amended to simply:

!""#$%&' )*+*,-.
CCC = - /012 03 40051 6075 or Negative Days Payable Outstanding (DPO).
8990:;2<;= >?@<05
9
The appropriate quarterly “accounts payables” and “cost of goods sold” were then found in the
quarterly balance sheet and income statements, respectively. The accounting period for January financial
statements were established as October 1st to December 31st of the previous calendar year: 92 days. The
accounting period for the April financial statements were determined to be 90 days, January 1st to March
31st. One exception arose in 2016, a leap year, where the April 2016 financial statements consisted of 91
days. The accounting period for the July financial statements were from April 1st to June 30th: 91 days.
The accounting period for the October financial statements consisted of the period between July 1st to
September 30th, meaning 92 days. Through these initial observations, we established the monthly DPOs
and CCCs, as well as the average annual DPO and CCC. Each calculation was done using Microsoft
Excel and we retained two decimals throughout for consistency.
10
Table 1: Netflix Inc’s DPO and CCC per financial statement publication (from January 2014 to October
2018):
Date of Accounts Cost of Goods Accounting Days Payables Cash
Financial Payable Sold Days Outstanding Conversion
Statement ($1000USD) ($1000USD) Cycle (Days)
Publication
January 2014 $108,435 $820,677 92 12.16 days -12.16 days
April 2014 $133,833 $869,186 90 13.86 days -13.86 days
July 2014 $137,226 $914,848 91 13.65 days -13.65 days
October 2014 $150,374 $954,394 92 14.50 days -14.50 days
January 2015 $201,581 $1,014,332 92 18.28 days - 18.28 days
April 2015 $190,567 $1,046,401 90 16.39 days -16.39 days
July 2015 $211,729 $1,121,752 91 17.18 days - 17.18 days
October 2015 $209,365 $1,173,958 92 16.41 days -16.41 days
January 2016 $253,491 $1,249.365 92 18.67 days -18.67 days
April 2016 $231,914 $1,369,540 91 15.41 days -15.41 days
July 2016 $240,458 $1,473,098 91 14.85 days -14.85 days
October 2016 $285,753 $1,532.844 92 17.15 days -17.15 days
April 2017 $294,831 $1,657,024 90 16.01 days - 16.01 days
July 2017 $273,398 $1,902,308 91 13.08 days - 13.08 days
October 2017 $301,443 $1,992,980 92 13.92 days - 13.92 days
April 2018 $436,183 $2,196,075 90 17.86 days - 17.86 days
July 2018 $448,219 $2,289,867 91 17.81 days - 17.81 days
October 2018 $441,427 $2,412,346 92 16.83 days - 16.83 days
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Table 1 Analysis:
By reference of the data in Table 1, a few trends are apparent. First, a firm is ideally looking to
decease their cash conversion cycle to 0 and Netflix has gone beyond this universal goal and established a
consistent significant negative cash conversion cycle. This is simply due to the fact that the firm has no
inventory and no credit sales, meaning no operating cycle. Hence, unless there are significant policy
changes, the cash conversion will remain negative for the foreseeable future. Second, it is strange that a
company with no inventory has a cost of goods sold now exceeding $2 billion. Consequently, with no
direct materials, the growing COGS must reflect a high direct labour and overhead costs. Evidently, like
many other tech companies, Netflix places high value on human capital. Nevertheless, their cost of goods
sold has tripled and their accounts payables have quadrupled from January 2014 to October 2018, a five-
year period. The lowest values for both accounts are seen in the January 2014 financial statements,
meaning from October 1, 2013 to December 31, 2013, as $108,435,000 for accounts payable and
$798,900 for “cost of goods sold”. The highest values for accounts payable are seen in July 2018
($448,219,000) and cost of goods sold in October 2018 ($2,412,346,000). An increase in these accounts is
not necessarily problematic, as they could reflect increased product expansion; however, special attention
must be taken to ensure that their market capitalization reflects increases in costs and credit purchases.
Consequently, the days inventory held, and cash conversion cycle are excellent representations of
the implications of this growing trend as they can consider the ratio of growth between the two accounts.
Evidently, a larger days payables outstanding (DPO) typically implies increased operational liquidity as it
reflects extended trade credit terms, an improved reputation and a better relationship with suppliers, as
well as an increased ability to hold cash, which can generate compounding interest and be used to invest
in other areas within the company. Conversely, a lower cash conversion cycle is ideal as it implies
improved operational liquidity and reflects a quicker turnover of sales into cash. Although there appears
to be an overall upward trend in the days payables outstanding and cash conversion cycle, there are
fluctuations throughout. Thus, it is important to graphically represent these values and further analyze the
data.
12
Graph 1:
Netflix Inc's Cash Conversion Cycle: January 2014 to October

2018
-12
2013-11-22 2014-06-10 2014-12-27 2015-07-15 2016-01-31 2016-08-18 2017-03-06 2017-09-22 2018-04-10 2018-10-27
-13
-14
-15
-16
-17
-18
y = 2E-17x6 - 6E-12x5 + 7E-07x4 - 0.0372x3 + 1184.3x2 - 2E+07x + 1E+11

R² = 0.5785
-19
Graph 1 Analysis:
The closest approximation to the curve was a 6-order polynomial function, whose R2 value is at
0.5785, meaning only 57.85% of the data can be explained by the polynomial equation. This demonstrates
a lack of consistency among the results. For example, a linear approximation resulted in a low R2 value of
0.1256 that reflects a slight upward trend; however, not a consistent one. The significant increase in cash
conversion cycle from January 2014 (-12.16 days) to January 2015 (-18.28 days) implies an intention to
improve trade controls and operational liquidity. Nevertheless, these efforts have clearly been difficult to
sustain. For example, in July and October 2017, the cash conversion cycle increased to -13.08 and -13.92.
13
ii. Monthly Stock Prices: Rate of Returns
Second, it is well established that Netflix is generally considered a growth stock, meaning its
stocks generally provide a consistent positive rate of return that exceeds annual inflation rates, and a
member of the popular FAANG group. Upon initial observation of the data, this consensus has been
confirmed, especially in the earlier years of our research. We exported data directly from Yahoo Finance.
Under the tab, historical data, each group member collected data by setting the time period from Dec. 1,
201X – November 1, 201(X+1). The reason December 1st was selected as the initial period was that
according to the efficient market hypothesis, this stock price should encompass all past publicly available
financial statements. We selected November 1st as the end period, as November is the last month available
due to our project due date of November 28, 2018. Furthermore, November 1st stock prices would reflect
the public’s response to the publication of the third quarter financial statements. As causation requires a
time effect between variable X and Y, the inclusion of November 1st data would better enable us to
establish a causation between operational liquidity and stock prices. Furthermore, we set our frequency to
monthly. Our reasoning behind this selection was that monthly stock prices were sufficient for
establishing a relationship between our two variables, regression and sensitivity analysis. We then
downloaded the raw data directly into Excel where we analysed the data. For consistency and precision
purposes, the cells were formatted as “General” inputs to preserve decimals. Although Netflix does not
tend to pay out dividends, all analysts used the adjusted close for consistency. All calculations were made
through the formula function on Excel. The average rate of return was calculated as the effective annual
rate of return to incorporate the assumption of compounding.
Formulas:
ABCDEFGB HIJEG(F) – ABCDEFGB HIJEG(FNO)
R(t) or Rate of Return = ABCDEFGB HIJEG(FNO)
Variance = (Average Rate of Return – Rate of Return (t))2
Standard Deviation = √𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒
Y
Average Monthly = ∑ %
Annual Rate of Return = (1 + Average Monthly Rate of Return)12 – 1
Annual Standard Deviation = √12 x Average Monthly Standard Deviation
Consequently, five tables were established and are represented in chronological order.
14
Table 2: Netflix Inc. - Rates of Return and Standard Deviation (December 1, 2013 to November 1, 2014)
Date Adj Close R(t) Variance Standard Deviation
2013-12-01 52.6
2014-01-01 58.48 0.1118 0.00005788 0.007608
2014-02-01 63.66 0.08858 0.00722636 0.085008
2014-03-01 50.29 -0.211 0.04604114 0.214572
2014-04-01 46.01 -0.08511 0.0078645 0.088682
2014-05-01 59.69 0.2973 0.0862761 0.293728
2014-06-01 62.94 0.0544 0.00258348 0.050828
2014-07-01 60.39 -0.04051 0.00194322 0.044082
2014-08-01 68.23 0.1298 0.01593351 0.126228
2014-09-01 64.45 -0.0554 0.0034777 0.058972
2014-10-01 56.11 -0.1294 0.01768155 0.132972
2014-11-01 49.51 -0.1176 0.01468265 0.121172
Average
0.003896 0.01852437 0.111259
monthly
Annual 0.047771 0.385413
Table 2 Analysis:
From December 2013 to November 2014, Netflix Inc. yielded a positive average monthly return
(0.3%) and EAR (4.78%). Nevertheless, these non-exceptional rates of return were met with a large risk
level: average monthly standard deviation of 11.13% and annual standard deviation of 38.54%. As seen
by Mehra and Prescott’s equity premium puzzle study, the historical U.S. equity premium (risky
security’s excess return relative to the risk-free treasury bill return) is typically greater than can be
rationalized in comparison to bonds and other financial assets (Mehra & Prescott, 2003, 2). For example,
the average inflation-adjusted annual return from 1889-2000 was 7.9% (Mehra & Prescott, 2003, 2) with
an annual standard deviation of 20% (Mehra and Prescott, 4), compared to a riskless security’s annual rate
of return of 1% and a standard deviation of 4% for the same period (Mehra & Prescott, 2003, 4). For U.S.
equities, this reflects a return to risk ratio of 0.395, while risk-free assets have a return to risk ratio 0.25.
For 2014, the inflation rate was 0.8% (Amadeo, 2018, 7). Therefore, the average inflation-adjusted annual
return for Netflix was 4.7771%-0.8% = 3.9771. Using this real return rate, the return to risk ratio for
Netflix Inc. from December 2013 to November 2014 is 0.1032, which is just over a quarter of the stock
ratio and less than half of the ratio of treasury bills. Nevertheless, we will determine if the risk justifies
the return in Table 7 where we analyze the NASDAQ values for the same time period.
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Standard
Date Adj Close R(t) Variance
Deviation
2014-12-01 48.80
2015-01-01 63.11 0.293288 0.043701313 0.20904859
2015-02-01 67.84 0.074943 8.64087E-05 0.009295626
2015-03-01 59.53 -0.122592 0.042778923 0.206830664
2015-04-01 59.02 -0.008520 0.008604145 0.092758533
2015-05-01 79.58 0.348356 0.069758035 0.264117465
2015-06-01 89.00 0.118371 0.001165022 0.034132426
2015-07-01 93.64 0.052135 0.001030679 0.032104193
2015-08-01 114.31 0.220739 0.018632243 0.136499976
2015-09-01 105.79 -0.074534 0.025208925 0.158773186
2015-10-01 105.98 0.001796 0.00679685 0.082443013
2015-11-01 108.38 0.022646 0.003793727 0.061593242
Average 0.084239 0.020141479 0.107854832
monthly
Annual 1.638231 0.373620099
Table 3 Analysis:
From December 2014 to November 2015, Netflix Inc. yielded an exceptional positive average
monthly return of 8.42% and an annual EAR of 163.823%. Despite these exceptional rates of return,
Netflix stockholders were actually met with a slightly lower risk level than the previous year, as
represented by the standard deviation: an average monthly standard deviation of 10.79% and an annual
standard deviation of 37.36%. In this year, it is immediately clear that the high returns justified the risk.
For 2015, the inflation rate was 0.7% (Amadeo, 2018, 7). Therefore, the inflation adjusted annual rate of
return for Netflix stock was 163.82%-0.7=163.12%. From December 2014 to November 2011, the return
to risk ratio is 4.3659, which far exceeds Mehra and Prescott’s 110 U.S. equity ratio of 0.395, as
calculated below Table 2. Nevertheless, we will compare the risk and return to Table 8 where we analyze
the NASDAQ values for the same time period.
16
2015-12-01 114.379997
2016-01-01 91.839996 -0.197062437 0.042763778 0.206794047
2016-02-01 93.410004 0.017095036 5.422E-05 0.007363426
2016-03-01 102.230003 0.094422424 0.007172534 0.084690814
2016-04-01 90.029999 -0.119338782 0.016659166 0.129070392
2016-05-01 102.57 0.139286917 0.016784578 0.129555307
2016-06-01 91.480003 -0.108121254 0.013889297 0.117852864
2016-07-01 91.25 -0.002514243 0.000149961 0.012245853
2016-08-01 97.449997 0.067945173 0.003388819 0.058213563
2016-09-01 98.550003 0.011287902 2.42204E-06 0.001556292
2016-10-01 124.870003 0.267072544 0.066224356 0.257340934
2016-11-01 117 -0.063025569 0.005293607 0.072757179
Average
monthly 0.00973161 0.015671158 0.097949152
Annual 0.123237066 0.339305815
Table 4 Analysis:
Although when comparing data for the period from December 2015 to November 2016 to the
data presented in Table 3, the rate of return has significantly dropped, the annual rate of return for the
period is still quite high at 0.973% a month and 12.32% annually. This positive rate of return is actually
approximately three times greater than the rate of return presented in Table 2 with a lower risk level, as
the standard deviation is now 9.79 per month or 33.93% a year. For 2016, the inflation rate jumped to
2.1% (Amadeo, 2018, 8). Therefore, the inflation adjusted rate of return for the period was 12.32%-
2.1%=10.22%. The return to risk ratio for this period is 0.3012, which is lower, but approaching Mehra
and Prescott’s average for U.S. stocks of 0.395. In Table 9, we shall compare this relationship to the
NASDAQ data for the same period.
17
Standard
Date Adj Close R(t) Variance
Deviation
2016-12-01 123.80
2017-01-01 140.71 0.1365913 0.00902171 0.094982676
2017-02-01 142.13 0.0100917 0.00099332 0.031516922
2017-03-01 147.81 0.0399634 2.7066E-06 0.001645186
2017-04-01 152.20 0.0297003 0.00014181 0.011908309
2017-05-01 163.07 0.0714192 0.00088867 0.029810585
2017-06-01 149.41 -0.0837677 0.01571922 0.125376307
2017-07-01 181.66 0.215849 0.03035972 0.174240406
2017-08-01 174.71 -0.0382583 0.00637872 0.079866885
2017-09-01 181.35 0.0380058 1.298E-05 0.003602762
2017-10-01 196.43 0.0831541 0.00172603 0.041545522
2017-11-01 187.58 -0.0450542 0.003793727 0.086662818
Average
0.0416086 0.00661412 0.061923489
monthly
Annual 0.6310027 0.862021965
Table 5 Analysis:
From December 2016 to November 2017, Netflix Inc.’s stock prices once again yielded an
exceptionally high positive rate of return. Although lower than the data presented in Table 3, the average
monthly rate of return for this period is 4.16% per month and 63.10% annually. Accompanying this
increase in rate of return is an exceptionally high standard deviation value of 6.19% per month or 86.20%
for the year. In 2017, the inflation rate was consistent with the previous year at 2.1% (Amadeo, 2018, 8).
The inflation-adjusted return is then 63.10%-2.10%=61%. Consequently, the return to risk ratio for this
period is 0.7076, which is nearly double that of Mehra and Prescott’s 110-year period ratio of 0.395.
Therefore, if stockholders are willing to endure large fluctuations in the value of the stock, they will be
rewarded with a rate of return that exceeds that which is anticipated by the risk level. In Table 10, we
shall examine this relationship further by comparing this ratio to NASDAQ values for the corresponding
period.
18
2017-12-01 186.82
2018-01-01 270.299988 0.44684717 0.15682582 0.3960124
2018-02-01 291.380005 0.07798749 0.00073727 0.02715272
2018-03-01 295.350006 0.01362482 1.38E-03 0.03720995
2018-04-01 312.459991 0.05793122 5.03595E-05 0.00709645
2018-05-01 351.600006 0.12526409 0.005539723 0.07442932
2018-06-01 391.429993 0.1132821 0.003899669 0.06244733
2018-07-01 337.450012 -0.1379046 0.035622535 0.18873933
2018-08-01 367.679993 0.08958358 0.001501471 0.03874881
2018-09-01 374.130005 0.01754246 1.11E-03 0.03329231
2018-10-01 301.779999 -0.193382 0.059641827 0.24421676
2018-11-01 286.209991 -0.0515939 0.010491633 0.10242867
Average
0.05083477 0.025163933 0.11016128
Monthly
Annual 0.81306432 0.38160986
Table 6 Analysis:
Although in recent months, analysts have been fairly critical toward Netflix Inc., the data from
December 2017 to November 2018 actually reflects an average monthly rate of return of 5.08% or an
annual rate of return of 81.31%. Evidently, these values are very high and three months of negative
returns (July 2018, October 2018 and November 2018) do not negate the overall trend. When comparing
these values to the preceding years, the rate of return has actually increased by 18.21% per year and the
standard deviation has dropped 48%. As equities should be examined in the long-run due to their
relatively high return and risk level compared to other financial assets, the data above implies that
investors’ panic is misplaced as it reflects very short-term downturns for this equity that are consistent
with previous years. The approximate current U.S. inflation rate is 2.5% (US Inflation Calculator, 2018,
1). Therefore, the inflation- adjusted rate of return is 81.31%-2.5%=78.81%. Furthermore, the return to
risk ratio for this period is actually 2.0652, which is far greater than the average U.S. common stock from
1889 to 2000. When comparing to its own ratios over the past five years, only December 2014 to
November 2015 is able to exceed this ratio. To substantiate our argument, this data set will be compared
to its equivalent NASDAQ values as presented in Table 11.
19
iii. NASDAQ (Market Index) Price: Rate of Return
As we are also examining rival causes to Netflix Stock Price fluctuations, we have selected
market risk as another potential variable. Consequently, as evidenced by Dr. William Sharpe’s (and
successors) inability to actually establish a CAPM market portfolio index, for the purpose of examining
this potential rival cause, we have selected NASDAQ as a market proxy. We have selected the NASDAQ
Composite as it is a large, long-standing, trusted, American, weighted index that includes Netflix and
thousands of other large companies. We have applied the same calculations and methodology to
NASDAQ Composite prices from December 1st, 2013 to November 1st, 2018 as we did for Netflix stock
prices.
We will be comparing the rates of return, risk level and return to risk ratio of the NASDAQ to
Netflix values calculated in Tables 2 to 6. Based on portfolio theory, the NASDAQ index, as a composite,
corresponds to a value that incorporates the diversification of its equities across company types and
industries. Thus, in theory, the NASDAQ should present a higher return to risk ratio, as it eliminates
specific or unsystematic risk. Therefore, our subsequent analysis will not only superficially examine the
relationship between Netflix Inc. and NASDAQ’s returns (we will analyse more deeply in Graphs 2-6 and
Tables 15 to 19), but also attempt to see if classic portfolio theory holds true.
Formulas:
ABCDEFGB HIJEG(F) – ABCDEFGB HIJEG(FNO)
R(t) or Rate of Return = ABCDEFGB HIJEG(FNO)
Variance = (Average Rate of Return – Rate of Return (t))2
Standard Deviation = √𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒
Y
Average Monthly = ∑ %
Annual Rate of Return = (1 + Average Monthly Rate of Return)12 – 1
Annual Standard Deviation = √12 x Average Monthly Standard Deviation
Consequently, five tables were established and are represented in chronological order.
20
Table 8: NASDAQ - Rates of Return and Standard Deviation (December 1, 2014 to November 1, 2015)
2013-12-01 4176.58984
2014-01-01 4103.87988 -0.0174089 0.00092397 0.03039694
2014-02-01 4308.12012 0.0497676 0.00135274 0.03677959
2014-03-01 4198.99023 -0.0253312 0.00146836 0.03831922
2014-04-01 4114.56006 -0.0201073 0.0010953 0.03309527
2014-05-01 4242.62012 0.03112363 0.0003289 0.01813562
2014-06-01 4408.18018 0.03902307 0.00067782 0.02603506
2014-07-01 4369.77002 -0.0087134 0.00047095 0.02170139
2014-08-01 4580.27002 0.04817187 0.0012379 0.03518386
2014-09-01 4493.39014 -0.0189683 0.0010212 0.0319563
2014-10-01 4630.74023 0.03056714 0.00030903 0.01757913
2014-11-01 4791.63 0.03474385 0.00047332 0.02175585
Average
Monthly 0.01298801 0.00085086 0.02826711
Annual 0.16748593 0.09792015
Table 8 Analysis:
From December 2013 to November 2014, NASDAQ Composite had a monthly rate of return of
1.30% and an annual rate of return of 16.75%. Applying the inflation rate of 0.8% for the period,
NASDAQ had an inflation-adjusted annual rate of return of 16.75%-0.8%=15.95%. The first observation
is that NASDAQ had an inflation-adjusted rate of return that exceeded Netflix’s rate of return by 11.97%.
The second observation is that NASDAQ’s risk level was a mere 2.82% per month or 9.79% for the
period compared to Netflix’s 38.54%. Therefore, NASDAQ’s return to risk ratio for the period was
1.6289, which significantly exceeded both Netflix’s ratio for the same period and Mehra and Prescott’s
average U.S. common stock ratio. With a lower risk level and higher returns, the effect of diversification
is clear in this period: the elimination of specific risk yields a far more favourable relationship between
return and risk where an investor can incur far less risk for a greater average return. This highlights the
potential benefit of investing in index funds over individual stocks during this period.
21

2014-12-01 4736.04981
2015-01-01 4635.24023 -0.0212856 0.000848834 0.02913475
2015-02-01 4963.52979 0.07082471 0.003965919 0.06297554
2015-03-01 4900.87988 -0.012622 0.000419071 0.02047122
2015-04-01 4941.41992 0.00827199 1.78777E-07 0.00042282
2015-05-01 5070.02979 0.0260269 0.00033043 0.01817773
2015-06-01 4986.87012 -0.0164022 0.000588129 0.02425138
2015-07-01 5128.27979 0.0283564 0.000420546 0.02050723
2015-08-01 4812.70996 -0.0615352 0.004814194 0.06938439
2015-09-01 4620.16016 -0.0400086 0.002290367 0.04785778
2015-10-01 5053.75 0.09384736 0.007395689 0.08599819
2015-11-01 5108.67 0.01086718 9.10836E-06 0.00301801
Average
Monthly 0.00784917 0.001916588 0.03474537
Annual 0.09836458 0.12036148
Table 9 Analysis:
NASDAQ had an inflation-adjusted annual rate of return of 9.84%-0.7%=9.14%. Unlike the preceding
period, NASDAQ had an inflation-adjusted rate of return that was lower than Netflix’s rate of return by
153.98%. The second observation is that NASDAQ’s risk level was a mere 3.47% per month or 12.04%
for the period compared to Netflix’s 37.36%. Accordingly, NASDAQ’s return to risk ratio for the period
was 0.7593, lower than its previous period and lower than Netflix’s ratio for the period, but far higher
than Mehra and Prescott’s average U.S. common stock ratio. In this period, although diversification
lowered the risk level compared to Netflix, a rational investor would still invest in Netflix over and ETF
as Netflix’s exceptionally high returns justified its higher risk level. Consequently, this 12-month period
is not consistent with traditional portfolio theory; however, this is likely to be an exceptional
circumstance.
22

2015-12-01 5007.41016
2016-01-01 4613.9502 -0.0785755 0.007226883 0.08501107
2016-02-01 4557.9502 -0.0121371 0.000344943 0.01857264
2016-03-01 4869.8501 0.06842986 0.003843297 0.06199433
2016-04-01 4775.35986 -0.0194031 0.000667635 0.02583864
2016-05-01 4948.04981 0.03616271 0.000883705 0.02972717
2016-06-01 4842.66992 -0.0212973 0.000769108 0.02773279
2016-07-01 5162.12988 0.06596773 0.003544083 0.0595322
2016-08-01 5213.22022 0.00989714 1.19827E-05 0.00346161
2016-09-01 5312 0.01894794 0.00015656 0.01251241
2016-10-01 5189.14014 -0.0231287 0.000874046 0.02956427
2016-11-01 5323.68018 0.02592723 0.000379926 0.0194917
Average
Monthly 0.00643553 0.001700197 0.03394899
Annual 0.08001936 0.11760273
Table 10 Analysis:
0.64% and an annual rate of return of 8%. Applying the inflation rate of 2.1% for the period, NASDAQ
had an inflation-adjusted annual rate of return of 8%-2.1%=5.9%. Like the preceding period, NASDAQ
had an inflation-adjusted rate of return that was lower than Netflix’s rate of return by 4.32%. The second
observation is that NASDAQ’s risk level was a mere 3.39% per month or 11.76% for the period
compared to Netflix’s 33.93%. Accordingly, NASDAQ’s return to risk ratio for the period was 0.5017,
lower than its previous period, but exceeding Netflix’s ratio for the period and Mehra and Prescott’s
average U.S. common stock ratio. Furthermore, although NASDAQ had a lower rate of return for this
period, there was less variance and risk, and consequently, NASDAQ maintained a better justification of
return for its level of risk than Netflix, as seen by its higher return to risk ratio. Therefore, this 12-month
period demonstrates the effects of diversification on reducing risk and is consistent with traditional
portfolio theory.
23
2016-12-01 5444.5
2017-01-01 5614.79004 0.03127744 9.54754E-05 0.00977115
2017-02-01 5825.43994 0.03751697 0.000256342 0.01601068
2017-03-01 5911.74023 0.01481438 4.47817E-05 0.00669191
2017-04-01 6047.60986 0.02298302 2.18072E-06 0.00147673
2017-05-01 6198.52002 0.02495369 1.18845E-05 0.00344739
2017-06-01 6140.41992 -0.0093732 0.000953544 0.03087951
2017-07-01 6348.12012 0.03382508 0.000151753 0.01231879
2017-08-01 6428.66016 0.01268723 7.77759E-05 0.00881907
2017-09-01 6495.95996 0.01046871 0.000121828 0.01103758
2017-10-01 6727.66992 0.03566986 0.000200607 0.01416356
2017-11-01 6873.97022 0.02174606 5.74873E-08 0.00023977
Average
Monthly 0.02150629 0.000174203 0.01044147
Annual 0.29089985 0.0361703
Table 11 Analysis:
NASDAQ had an inflation-adjusted annual rate of return of 29.09%-2.1%=26.99%. Like the preceding
period, NASDAQ had an inflation-adjusted rate of return that was lower than Netflix’s rate of return by
34.01%. The second observation is that NASDAQ’s risk level was a mere 1.044% per month or 3.617%
for the period compared to Netflix’s 86.20%. Accordingly, NASDAQ’s return to risk ratio for the period
was 7.4619, higher than any of our calculated previous periods and exceeding Netflix’s ratio by about ten
times for the period and Mehra and Prescott’s average U.S. common stock ratio. This is most likely due to
the one-time corporate tax cut (TCJA 2017). Therefore, although NASDAQ had a lower rate of return for
this period, there was far less variance and risk. Consequently, NASDAQ maintained a better justification
of return for its level of risk than Netflix, as seen by its significantly higher return to risk ratio. In brief,
this 12-month period demonstrates the effects of diversification on reducing risk and is consistent with
traditional portfolio theory.
24
2017-12-01 6903.39014
2018-01-01 7411.47998 0.07360005 0.005186913 0.07202023
2018-02-01 7273.00977 -0.0186832 0.00041059 0.02026302
2018-03-01 7063.4502 -0.0288133 0.000923743 0.03039314
2018-04-01 7066.27002 0.00039921 1.39383E-06 0.0011806
2018-05-01 7442.12012 0.05318932 0.002663541 0.0516095
2018-06-01 7510.29981 0.00916133 5.74793E-05 0.00758151
2018-07-01 7671.79004 0.0215025 0.000396913 0.01992268
2018-08-01 8109.54004 0.0570597 0.003078017 0.05547988
2018-09-01 8046.3501 -0.007792 8.78319E-05 0.00937187
2018-10-01 7305.8999 -0.0920231 0.008761509 0.09360293
2018-11-01 6938.97998 -0.0502224 0.002683471 0.05180223
Average
Monthly 0.00157982 0.002204673 0.03756615
Annual 0.01912341 0.13013295
Table 12 Analysis:
NASDAQ had an inflation-adjusted annual rate of return of 1.9123%-2.5%= -0.5877%. For the first time
in our study, the inflation rate was actually higher than the annual rate of return for this 12-month period,
establishing a negative inflation-adjusted annual rate of return. Consequently, the low levels of risk of
3.76% per month or 13.01% per year are not sufficiently low to justify negative returns. During this
period, treasury bonds would have yielded a higher rate of return for a far lower risk level. Evidently, the
return to risk ratio is significantly lower than both Netflix Inc.’s ratio and Mehra and Prescott’s average
U.S. common stock ratio. This may be due to the after effects of the TCJA 2017, adjustments after an
artificial rise in stock prices, or political instability during this period. Nevertheless, for this 12 month
period, investors would have clearly been far better off purchasing and holding Netflix stocks, rather than
an index fund, which contradicts the traditional portfolio theory once again.
25
iv. Correlation Between Operational Liquidity and Stock Prices
Now that we have independently examined our dependent, independent and potential lurking
variable, we will return to our examination of Netflix’s cash conversion cycle and its rate of returns.
Table 13:
Cash
Conversion
Date Cycle R(t) Netflix Correlation
2014-01-01 -12.16 0.1118 0.0515226
2014-04-01 -13.86 -0.08511
2014-07-01 -13.65 -0.04051
2014-10-01 -14.5 -0.1294
2015-01-01 -18.28 0.293288
2015-04-01 -16.39 -0.00852
2015-07-01 -17.18 0.052135
2015-10-01 -16.41 0.001796
2016-01-01 -18.67 -0.1970624
2016-04-01 -15.41 -0.1193388
2016-07-01 -14.85 -0.0025142
2016-10-01 -17.15 0.26707254
2017-01-01 -17.4 0.1365913
2017-04-01 -16.01 0.0297003
2017-07-01 -13.08 0.215849
2017-10-01 -13.92 0.0831541
2018-01-01 -15.7 0.44684717
2018-04-01 -17.86 0.05793122
2018-07-01 -17.81 -0.1379046
2018-10-01 -16.83 -0.193382
Throughout the course of our study, from financial statements spanning January 1,2014 to
November 1, 2018, we have calculated a correlation of 0.0515226 between the cash conversion cycle and
Netflix stock’s rate of return. This calculation was done directly on excel using the CORREL function.
Although we correctly hypothesized that there was a positive correlation between our two variables, the
correlation is fairly negligible and could simply due to chance. Consequently, we conducted a sensitivity
analysis using Excel Solver’s Data Regression Analysis to investigate further.
26
Table 14:
Regression Statistics
Multiple R 0.005390572
R Square 2.90583E-05
Adjusted R -
Square 0.058792762
Standard Error 0.179484801
Observations 19
df SS MS F Significance F
Regression 1 1.59143E-05 1.59143E-05 0.000494005 0.982526304
Residual 17 0.547651496 0.032214794
Total 18 0.54766741
Standard
Coefficients Error t Stat P-value
Intercept 0.044204088 0.402904867 0.109713461 0.913921355
-12.16 0.000555008 0.024970847 0.02222622 0.982526304
Table 14 Analysis:
Table 14 reflects the regression output of Table 13. Using the information above, an
approximation of the relationship between the cash conversion cycle and the rate of return for Netflix Inc.
from January 1, 2014 to November 1, 2018 can be established as following: y=0.044204088-
0.000555008x , with y representing the rate of return and x representing the cash conversion cycle in
days.
When examining the summary output, the two variables have a coefficient of correlation (r) of merely
34.15% and a coefficient of determination (r2) of 2.90583E-05%. Therefore, nearly none of the rate of
return changes can be explained by changes in the cash conversion cycle. Due to the small sample size,
the adjusted r2 value is a mere -0.058792762%. Either way, the model is clearly not a good reflection of
changes in the rate of return.
This evidently does not demonstrate a strong relationship between our two variables and the model
should never be used for forecasting attempts. Furthermore, with a standard error of 0.179484801, while
27
the average rate of return is merely 0.03912113. As the standard error exceeds the mean value of y, this
subjective measurement suggests that the model’s error is particularly large.
Furthermore, establishing a null hypothesis H0: B=0, meaning there is no linear relationship between
the independent variable and the dependent variable and establishing an alternate hypothesis H1: B¹0,
meaning that the independent variable is linearly related to the dependent variable, we will conduct an F-
test using the ANOVA Output. According to table 14, the test statistic is F=0.000494005. With n=19, k=1
and n-k-1=17, establishing an alpha of 0.05, Falpha, k, n-k-1=4.45, which far exceeds our test statistic, we are
not able to reject the null hypothesis and thus, we are not able to statistically infer that there is a linear
relationship between Netflix’s cash conversion cycle and stock prices’ annual rate of return using the
financial statements from January 2014 to October 2018. Accordingly, unlike our initial hypothesis, it is
unlikely that changes in trade credit terms will yield much effect on Netflix’s stock prices and market
capitalization. Therefore, there is no point conducting scenario analysis, as our model does not
statistically hold. As such, we will delve deeper into the relationship between market fluctuates (as
represented by the proxy NASDAQ) and Netflix’s rate of return.
28
v. Correlation Between NASDAQ and Netflix Inc. Rates of Return
By combining table 2 and 7, tables 3 and 8, tables 4 and 9, tables 5 and 10, tables 6 and 11, we are
able to establish a correlation between NASDAQ and Netflix Inc’s rate of returns and analyze the data
with sensitivity analysis for each 12-month period.
Graph 2:
Netflix Inc. & NASDAQ Composite

Monthly Rate of Returns (December1, 2013-
November 1, 2014)
0.4
0.3
0.2
0.1
0
il
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ry
ay
r
ch
y
ry
er
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us
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ua
ar
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ug
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A
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ct
A
Ja
pt
ec
O
Fe
Se
D
-0.2
-0.3
R(t) NASDAQ R(t) Netflix
29
Graph 2 Analysis:
Upon visual examination of graph 2, it appears clear that there is a relationship between
NASDAQ and Netflix’s rate of returns for December 1, 2013 to November 1, 2014. From December to
January, the two lines both rise. From January to February, both lines drop. From February to March,
both lines rise once again. From March to April, both lines continue to rise at an even higher rate than the
previous month. From April to May, NASDAQ rises slightly, while Netflix drops sharply; however, the
mirroring resumes once again until August to September, where NASDAQ rises, and Netflix drop.
Despite the exceptions in two periods, the overall picture of the graph reflects a situation where Netflix
tends to mirror NASDAQ’s movements; however, Netflix’s rises, and falls are amplified in comparison.
Consequently, this reflects a beta that exceeds 1. Despite the appearance of a relationship upon visual
examination, the correlation between the two data sets is 0.44435754 (as calculated using the CORREL
function on Excel). This implies that there is a positive relationship between NASDAQ and Netflix
during this period; however, the extent of this relationship requires further analysis.
Table 15:
R Square 0.3283811
Adjusted R
Square 0.24442873
Observations 10
Significance
df SS MS F F
Regression 1 0.066534899 0.066534899 3.911517023 0.083337676
Residual 8 0.136079988 0.017009998
Total 9 0.202614886
Standard
Intercept -0.0521558 0.04716718 -1.1057643 0.30096979
-0.0174089 2.82397159 1.42786685 1.97775555 0.08333768
30
Table 15 Analysis:
Table 15 reflects the regression output of Graph 2. Using the information above, an approximation of
the relationship between the NASDAQ and the rate of return for Netflix Inc. from December 1, 2013 to
November 1, 2014 can be established as following: y= - 0.0521558 + 2.82397159x , with y representing
Netflix’s monthly rate of return and x representing NASDAQ’s monthly rate of return.
When examining the summary output, the two variables have a coefficient of correlation (r) of
57.30% and a coefficient of determination (r2) of 32.83811%. This is an immediate jump from the values
as calculated in our analysis of table 14, examining the relationship between the cash conversion cycle
and the rates of return. Therefore, 32.83811% of the changes in Netflix’s monthly rate of return can be
contributed to the model. Consequently, 67.16189% of changes in Netflix’s rate of return cannot be
explained by the model.
Furthermore, with a standard error of 0.13042238, while Netflix’s average rate of return is merely
0.03896 (as calculated in Table 2), the standard error exceeds the mean value of y, so this subjective
measurement suggests that the model’s error is particularly large.
test using the ANOVA output. According to table 15, the test statistic is F=3.911517023. With n=10, k=1
and n-k-1=8, establishing an alpha of 0.05, Falpha, k, n-k-1=5.32, which exceeds our test statistic. Therefore,
we are not able to reject the null hypothesis and thus, we are not able to statistically infer that there is a
linear relationship between Netflix’s monthly rates of return and NASDAQ’s monthly rates of return for
December 1, 2013 to November 1, 2014. Nevertheless, it is clear from our analysis that the relationship
between NASDAQ and Netflix’s rate of returns is stronger than that of the cash conversion cycle and
Netflix’s stock prices.
31
Graph 3:

November 1, 2015)
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Graph 3 Analysis:
Upon visual examination of graph 3, the relationship between NASDAQ rates of return and
Netflix’s rates of return is immediately not as clear as graph 2. From December to January, May to June,
June to July, and July to August, the rates of return move in opposite directions. For January to February,
February to March, March to April, April to May, September to October and October to November, the
rates of return move in the same direction. The correlation between the two data sets is -0.1216559 (as
calculated using the CORREL function on Excel). This implies that there is a negative relationship
between NASDAQ and Netflix during this period; however, the extent of this relationship requires further
analysis.
32
Table 16:
R Square 0.000746023
Adjusted R -
Square 0.124160724
Observations 10
Significance
df SS MS F F
Regression 1 0.000129423 0.000129423 0.005972638 0.940296451
Residual 8 0.173355208 0.021669401
Total 9 0.173484631
Standard
Intercept 0.064196584 0.047869791 1.341066747 0.216725475
- - -
0.021285581 0.080146125 1.037049347 0.077282846 0.940296451
Table 16 Analysis:
November 1, 2015 can be established as following: y= 0.064196584 - 0.080146125x, with y representing
2.7313418% and a coefficient of determination (r2) of 0.0746023%. As suspected by a visual analysis of
graph 3, barely any of the changes in Netflix’s monthly rates of return can be explained by changes in
NASDAQ’s rates of return for the period of December 1, 2014 to November 1, 2015. Consequently,
nearly all of the changes in Netflix’s rate of return cannot be explained by the model.
33
December 1, 2014 to November 1, 2015.
34
Graph 4:

November 1, 2016)
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Graph 4 Analysis:
Upon visual examination of graph 4, the relationship between NASDAQ rates of return and
Netflix’s rates of return is slightly clearer than graph 3. From December to June, the rates of return move
together. From June to November, the rates of return move in opposite directions. The correlation
between the two data sets is 0.41588451 (as calculated using the CORREL function on Excel). This
implies a positive relationship between NASDAQ and Netflix during this period; however, the extent of
this relationship requires further analysis.
35
Table 17:
R Square 0.01356651
Adjusted R -
Square 0.109737677
Observations 10
Significance
df SS MS F F
Regression 1 0.001700461 0.001700461 0.110024728 0.748638712
Residual 8 0.123642121 0.015455265
Total 9 0.125342583
Standard
Coefficients Error t Stat
Intercept 0.024471108 0.043199587 0.56646625
-
0.078575541 0.397673527 1.198896047 0.331699756
Table 17 Analysis:
November 1, 2016 can be established as following: y= 0.024471108 + 0.397673527x, with y representing
Netflix’s monthly rate of return and x representing NASDAQ’s monthly rate of return. As we saw from
our visual examination, four periods present a negative correlation between the two variables.
Consequently, we can intuitively assume that the model will most likely not be statistically significant.
11.6475361% and a coefficient of determination (r2) of 1.356651%. Thus, nearly all of the changes in
Netflix’s rate of return cannot be explained by the model.
36
37
Graph 5:

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Graph 5 Analysis:
Upon visual examination of graph 5, there appears to be a relationship between the two data sets.
Upon closer inspection, the data sets actually move in opposite directions for the periods between
December to March and September to October. The correlation between the two data sets is surprisingly
high – 0.6647869 - (as calculated using the CORREL function on Excel). This implies a rather strong
positive relationship between NASDAQ and Netflix during this period; however, the extent of this
relationship requires further analysis.
38
Table 18:
R Square 0.409742136
Adjusted R
Square 0.335959903
Observations 10
Significance
df SS MS F F
Regression 1 0.025744686 0.025744686 5.553398427 0.046205313
Residual 8 0.037086748 0.004635844
Total 9 0.062831435
Standard
-
Intercept 0.045287967 0.039272032 -1.153186217 0.28212269
0.031277443 3.770160758 1.599854371 2.356564964 0.046205313
Table 18 Analysis:
November 1, 2017 can be established as following: y= -0.045287967 + 3.770160758x, with y
representing Netflix’s monthly rate of return and x representing NASDAQ’s monthly rate of return.
64.0111034% and a coefficient of determination (r2) of 40.9742136%. Consequently, approximately 41%
of the changes in Netflix’s monthly rate of returns can be explained by changes in NASDAQ’s rate of
return, meaning 59% of changes in the y variable cannot be explained by the model.
39
and n-k-1=8, establishing an alpha of 0.05, Falpha, k, n-k-1=5.32, which exceeds our test statistic. Therefore, at
a confidence level of 95%, we are finally able to reject our null hypothesis and statistically infer that there
is a linear relationship that exists between Netflix’s monthly rates of return and NASDAQ’s monthly rates
of return for December 1, 2016 to November 1, 2017.
Graph 6:

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Graph 6 Analysis:
Upon visual examination of graph 6, there appears to be a clear relationship between the two data
sets. Every period reflects movements in the same direction, nevertheless, our correlation calculation of –
0.1399213 (as calculated using the CORREL function on Excel) reflects the importance of quantitative
analysis.
Table 19:
R Square 0.088887476
Adjusted R -
Square 0.025001589
Observations 10
Significance
df SS MS F F
Regression 1 0.000160993 0.000160993 0.780474193 0.402763147
Residual 8 0.001650212 0.000206276
Total 9 0.001811205
Standard
Intercept 0.020005353 0.004580308 4.367687391 0.002387881
-
0.073600048 0.093171126 0.105463473 -0.883444505 0.402763147
41
Table 19 Analysis:
November 1, 2017 can be established as following: y= 0.020005353 -0.093171126x, with y representing
29.8140028% and a coefficient of determination (r2) of 8.8887476%. Consequently, approximately 91%
of the changes in Netflix’s monthly rate of returns cannot be explained by changes in NASDAQ’s rate of
return.
0.05083477 (as calculated in Table 6), the mean y exceeds the standard error, so this subjective
measurement suggests that the model’s error is not particularly large.
and n-k-1=8, establishing an alpha of 0.05, Falpha, k, n-k-1=5.32, which exceeds our test statistic. Therefore, at
a confidence level of 95%, we are unable to reject our null hypothesis and cannot statistically infer a
relationship between Netflix’s monthly rates of return and NASDAQ’s monthly rates of return for
42
4.3 Qualitative Analysis: Examination of Double-Blind Peer Reviewed
Publications
Through our quantitative analysis, we were only able to establish one statistically significant
relationship for NASDAQ monthly rate of returns on Netflix Inc.’s rate of returns from December 1, 2016
to November 1, 2017. Surprisingly, many fundamental theories such as portfolio theory and efficient
market hypothesis is not reflected in our data. Consequently, as a qualitative analysis emphasizes
description, understanding and exploration, we will examine double blind peer reviewed journals to make
sense of our results. Our exploratory methodology will centre around secondary literature searches and
case studies.
i. “Trade Credit: Theories and Evidence”
Michael A. Peterson and Raghuram G. Rajan present their case for firms to supplement borrowing
from financial institutions through financing from their suppliers. The primary purpose of their study is to
bridge the gap between motives for using non-financial firms to lend money and actual empirical tests of
these theories (Peterson and Rajan, 1997, p.661). We have selected this paper as it firstly deals with trade
credit, which was Netflix Inc.’s sole determinant of its operational liquidity and our inability to bridge
theory and our collected empirical data. Therefore, we are looking to this paper to shed some light on our
analysis.
According to the authors, for U.S. firms, trade credit is the most important source of short-term
external financing (Peterson and Rajan, 1997, p.662). The authors provide many theoretical explanations
for firms’ reliance of non-financial institutions on trade credit. First, trade credit can provide access to
capital for organizations that are unable to raise funds through traditional financial channels (Peterson and
Rajan, 1997, p.662). We do not believe that this first theoretical explanation is applicable to Netflix Inc.
due to exceptional international reputation. Second, suppliers can be better than financial institutions in
evaluating and controlling their buyers’ credit risk (Peterson and Rajan, 1997, p.662). This second
explanation is often substantiated by circumstances where the supplier has better access to credit markets
and can consequently act as an intermediate financing institution to firms with less access (Peterson and
43
Rajan, 1997, p.662). Once again, this explanation does not appear to explain Netflix Inc.’s circumstances:
if anything, Netflix Inc. would possess far greater access to credit markets than any one of its suppliers, as
they will inevitably possess a smaller market capitalization and less ubiquitous international presence.
Third, trade credit enables suppliers to price discriminate through credit when price discrimination is
illegal (Peterson and Rajan, 1997, p.662). This third explanation appears to reflect a greater likelihood
that the preceding explanations. Nevertheless, we cannot precisely determine Netflix Inc.’s exact
motivations, but rather speculate around its strategies. Another interesting possibility is that trade credit
can reduce transaction costs and provide assurances regarding the quality of the suppliers’ products
(Peterson and Rajan, 1997, p.662) and the supplier can use the trade credit as leverage to continue its
relationship and control aspects of the buyers’ business (Peterson and Rajan, 1997, p.663). On the balance
of probabilities, this fourth explanation is the most likely, as Netflix Inc.’s Cost of Goods Sold has
increased at a smaller rate than its accounts payables. Therefore, rather than paying their bills each time
goods are delivered, Netflix can pay them on a pre-organized payment or delivery cycle that ensures
consistent liquidity even for countries with strong seasonal consumption patterns (Peterson and Rajan,
1997, p.665). Through a visual examination of our graphs, it is clear that Netflix does experience seasonal
consumption patterns, and trade credit extensions would ensure liquidity in periods of low consumption.
Furthermore, with its increased competition in the content delivery network market, reducing transaction
costs and ensuring quality products would provide the firm with the competitive advantage it needs to
survive. Nevertheless, as the authors establish, there is currently very little systematic evidence for the
reasons behind trade credit extensions or which characteristics reflect larger users or providers of trade
credit.
According to the econometric model, a firm is viewed as a supplier through the interpretation of its
accounts receivables as a proxy for how much it lends (Peterson and Rajan, 1997, p.666). Clearly, Netflix
Inc. with an accounts receivable of $0 is not a supplier to any firm. The proxy that the authors use for
determining if a firm is a customer is through its accounts payable (Peterson and Rajan, 1997, p.666).
Therefore, Netflix can be categorized as a clear borrower. Moreover, as credit terms typically quote a
discount date, due date, and discount amounts, the fraction of the firm’s annual purchases that are made
44
on account is another good proxy of the quantity of credit supplied (Peterson and Rajan, 1997, p.669).
Thus, the combination of these two proxies should be used to predict the supply of trade credit to the firm
and how long the firm typically takes to repay its debt. Consequently, if we were to continue our
evaluation, perhaps we could establish a greater relationship between Netflix stock prices and its cash
conversion cycle by incorporating the firms’ proportion of annual credit purchases into our model.
Finally, through the examination of this publication, we can see that Netflix is unlike the firms used
for the author’s study, both small and large through NSSBF and Compustat. For example, for larger
Compustat firms, the typical accounts receivable to sales ratio is 18.5% and typically larger firms are
more likely to be suppliers than smaller firms (Peterson and Rajan, 1997, p.670-671). This is clearly not
the case with Netflix, which make explain why operational liquidity did not appear to be an important
factor to Netflix Inc.’s stock prices, stock price movements and market capitalization. The authors also
establish that firms that experience a sales decline often experience an increase in their account
receivables to sales ratio (Peterson and Rajan, 1997, 673). Firms that grow quickly were found to also
extend more credit. As seen by the periods of significantly high rates of return over the studied five-year
period, Netflix is clearly a firm that has grown quickly. Nevertheless, another typical relationship between
firm’s financial position and short-term operational liquidity is inapplicable to Netflix. Perhaps, Netflix
has simply refused to maintain an accounts receivable as a strategic tool to send a signal to investors of a
prosperous financial position.
45
ii. “Liquidity- profitability trade-off: An empirical investigation in an
emerging market”
In Abuzar M.A. Eljelly’s empirical examination of the relationship between profitability and
liquidity, with specific reference to a sample of Saudi Arabian stocks, the author was able to use
correlation and regression analysis to establish a stable and significant negative relationship between
profitability and liquidity (Eljelly, 2004, 48). This article was selected as a way to explore differences in
international markets and potential improvements to our methodology for further study. Where our
research failed to establish a correlation between the cash conversion cycle and profitability, this study
was successful.
The author establishes that although working capital was typically perceived as a safety cushion for
suppliers of short-term funds and viewed positively due to the availability of excess working capital and
cash, this perspective has recently shifted (Eljelly, 2004, 49). From an operational point of view (our area
of study), working capital is often being perceived as a “restraint on financial performance”, as these
assets are not contributing to return on equity (Eljelly, 2004, 49). He further postulates that liquidity
management has particular importance in troubled times, as cash management is typically the financial
area that is overlooked and misunderstood (Eljelly, 2004, 49). Applying these notions to Netflix’s case,
we agree with the author as this study began through interest regarding investors’ disapproval of Netflix’s
recent liquidity position, despite our data indicating that Netflix has actually improved its liquidity
position over the past few years. Consequently, in times of perceived trouble, investors are quick to attack
liquidity and placing a stronger relationship between liquidity and profitability than may actually exist.
Moreover, Eljelly also establishes shortcomings with Baumol and Miller and Orr’s models of cash
management that aid financial managers in understanding cash management problems, but often fail in
their required assumptions that do not hold in practice (Eljelly, 2004, 49). Consequently, the author
suggests a treasury approach to cash management, with a particular focus on flows that arrive from a
fragmented approach to cash collection and payment cycles (Eljelly, 2004, 49). Additionally, academics
believe that the inclusion of any metrics that include operating assets (such as the current ratio or quick
46
ratio) is not useful to reflect the going concern assumption (Eljelly, 2004, 50). Through these suggestions,
we feel academically supported in our decision to use the cash conversion cycle over other liquidity
metrics: it reflects a simple and easy metric that fragments the corporation’s cash flows and excludes
operating assets. This is echoed by Kamath who suggest that the cash conversion be used to replace
typical liquidity ratios (e.g. the current and quick ratio) (Eljelly, 2004, 50).
Finally, the author confirms our definition of the cash conversion cycle and that a shorter CCC is
desirable as it implies a reduced need for external financing which will incur explicit interest costs or
implicit costs from alternative financing sources like equity (Eljelly, 2004, 50). Most notably, the author
points out that unlike the U.S., in Saudi Arabia, where he was able to establish a relationship between
liquidity – as presented through the CCC – and profitability, interest costs are greater due to the lack of
tax savings and the requirement by Islamic sharia of zakat, a fixed percentage tax (Eljelly, 2004, 50).
Consequently, a close eye on interest costs through the cash conversion cycle may be more significant in
countries like Saudi Arabia than U.S. corporations like Netflix Inc; however, the Shin and Soenen 1998
investigation of American firms from 1975 to 1994 also demonstrates a strong negative correlation
between the firm’s cash conversion cycle and stock returns (Eljelly, 2004, 51). Shin and Soenen’s
successfully study and use of the same indicators as our study seem to suggest that it was perhaps the
short-term analysis that failed to yield statistically significant results or the Netflix’s exceptional stance on
operational liquidity. Therefore, firms’ cash conversion cycle typically reflects any lost profits and
unnecessary costs from holding excessive liquidity; however, perhaps this negative correlation is not
apparent in a five year period or not apparent in companies with consistently negative cash conversion
cycles.
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5 Conclusion
According to our quantitative analysis, for Netflix Inc., the cash conversion cycle, which typically
reflects a negative correlation with stock prices, was unable to explain any changes in stock prices.
According to our research, this is likely due to Netflix’s consistently negative cash conversion cycle and
stance (as an outlier for large corporations) of being a trade credit borrower rather than supplier. Although
Netflix critics appear to be focused on its cash flows, it appears as though it has maintained pretty
consistent trade credit policies over the past five years. Consequently, this strong association between
operational liquidity and profitability that may hold for other large firms has been demonstrated to be
inapplicable for Netflix Inc.
Furthermore, upon examination of the relationship between Netflix Inc. and NASDAQ prices, we are
able to see a relationship; however, the relationship appears to only hold in a statistically significant
manner (95% confidence level) from December 2016 to November 2017. We encourage further study in
this area to examine a longer-term relationship between Netflix and NASDAQ.
Finally, our qualitative analysis demonstrates that the critics analysis application of a negative
relationship between liquidity metrics and profitability does hold for the majority of both small and large
corporations. Nevertheless, Netflix appears to be an exception to the rule and its profitability appears to
be dependent on factors that are disassociated from liquidity. Consequently, further research is also
encouraged into other potential rival causes for fluctuations in Netflix Inc.’s stock prices.
48
Appendix A: Raw Data:
A. Financial Statements (Balance Sheet and Income Statement in Chronological Order)
Netflix.Inc
Balance Sheet
December 1, 2014
(In $thousands) December 31, June 30, September 30,

2013 March 31, 2014 2014 2014
Assets
Current assets:
Cash and cash equivalents $ 604,965 $1,157,450 $1,214,244 $ 1,183,217
Short-term investments 595,440 510,793 500,121 483,602
Current content library, net 1,706,421 1,771,410 1,786,341 2,006,981
Other current assets 151,937 147,131 167,674 149,682
Total current assets 3,058,763 3,586,784 3,668,380 3,823,482
Non-current content library, net 2,091,071 2,179,474 2,348,796 2,631,882
Property and equipment, net 133,605 133,473 141,715 144,147
Other non-current assets 129,124 148,375 166,931 178,818
Total assets $ 5,412,563 $6,048,106 $6,325,822 $ 6,778,329
Liabilities and Stockholders'
Equity
Current liabilities:
Current content liabilities $ 1,775,983 $1,844,897 $1,858,020 $ 2,074,766
Accounts payable 108,435 133,883 137,226 150,374
Accrued expenses 54,018 54,858 98,548 70,559
Deferred revenue 215,767 230,015 241,330 252,956
Total current liabilities 2,154,203 2,263,653 2,335,124 2,548,655
Non-current content liabilities 1,345,590 1,321,879 1,390,770 1,510,403
Long-term debt 500,000 900,000 900,000 900,000
Long-term debt due to related
party - - - -
Other non-current liabilities 79,209 84,216 90,223 94,397
Total liabilities 4,079,002 4,569,748 4,716,117 5,053,455
Stockholder’s Equity:
Common stock 60 60 60 60
Additional paid-in capital 777,441 868,195 926,525 987,256
Accumulated other
comprehensive income (loss) 3,575 4,503 6,502 1,645
Retained earnings 552,485 605,600 676,618 735,913
Total stockholders' equity 1,333,561 1,478,358 1,609,705 1,724,874
Total liabilities and
stockholders' equity $ 5,412,563 $6,048,106 $6,325,822 $ 6,778,329
49
Netflix. Inc
Income Statement
December 1, 2014
September
December 31, March 31, June 30, 30,
2013 2014 2014 2014
(in $thousands)
Revenues $ 1,175,230 $1,270,089 $1,340,407 $ 1,409,432
Cost of Revenues 820,677 869,186 914,848 954,394

Netflix. Inc
Balance Sheet
December 1, 2015
September
(In $ thousands) 2014 2015 2015 2015
Assets
Current assets:
Cash and cash equivalents $ 1,113,608 $2,454,777 $2,293,872 $ 2,115,437
Current content assets, net 2,166,134 2,439,171 2,582,636 2,762,397
Non-current content assets, net 2,773,326 3,312,353 3,640,767 3,891,790
Total assets $ 7,042,500 $9,209,494 $9,624,549 $ 9,886,786
Equity
Current content liabilities $ 2,117,241 $2,425,619 $2,556,180 $ 2,622,964
Long-term debt 885,849 2,368,868 2,369,688 2,370,519
Long-term debt due to related
party - - - -
Stockholders' equity:
Common stock 1,042,870 1,109,388 1,200,880 1,306,461
Accumulated other
comprehensive income (loss) (4,446) (43,154) (38,120) (37,890)
Retained earnings 819,284 842,980 869,315 898,747
50
Netflix. Inc
Income Statement
December 1, 2015
(In $thousands)
December 31, March 31, June 30, September 30,
2014 2015 2015 2015
Revenues $1,484,728 $1,573,129 $1,644,694 $1,738,355

Cost of
revenues* 1,014,332 1,046,401 1,121,752 1,173,958
Netflix. Inc
Balance Sheet
December 1, 2016
September
(In $thousands) 2015 2016 2016 2016
Assets:
Current assets:
Cash and cash equivalents $ 1,809,330 $1,605,244 $1,390,925 $969,158
Total assets $ 10,202,871 $ 11,262,274 $ 11,593,507 $ 12,347,338
Equity
Current content liabilities $ 2,789,023 $ 3,145,861 $ 3,242,330 $ 3,497,214
Long-term debt 2,371,362 2,372,218 2,373,085 2,373,966
Common stock 1,324,809 1,382,051 1,443,707 1,503,641
Accumulated other
comprehensive income (loss) (43,308) (34,401) (38,211) (36,530)
Retained earnings 941,925 969,583 1,010,338 1,061,855
stockholders' equity $ 10,202,871 $ 11,262,274 $ 11,593,507 $ 12,347,338
51
Netflix. Inc
Income Statement
December 1, 2016
December
(In $ thousands) 31, March 31, June 30, September 30,
2015 2016 2016 2016
Revenues $ 1,823,333 $1,957,736 $2,105,204 $2,290,188
Cost of
revenues 1,249,365 1,369,540 1,473,098 1,532,844
Netflix. Inc
Balance Sheet
December, 2017
December 31, March 31, June 30, September 30,
(In $thousands) 2016 2017 2017 2017
Assets
Current assets:
Cash and cash equivalents $ 1,467,576 $1,077,824 $1,918,777 $1,746,469
Short-term investments 266,206 263,405 246,125
Total assets $13,586,610 $ 14,359,096 $ 16,517,223 $ 16,951,540
Equity
197,632 296,258 248,871 331,723
Deferredexpenses
Accrued revenue 443,472 458,693 505,302 535,425
Long-term debt 3,364,311 3,365,431 4,836,502 4,888,783
Common stock 1,599,762 1,669,132 1,727,858 1,807,123
Accumulated other
comprehensive loss (48,565) (45,859) (31,368) (25,362)
Retained earnings 1,128,603 1,350,410 1,416,010 1,545,600
stockholders' equity $ 13,586,610 $ 14,359,096 $ 16,517,223 $ 16,951,540
52
Netflix. Inc
Income Statement
December 1, 2017
December September
(in $ thousands) 31, March 31, June 30, 30,
2016 2017 2017 2017
Revenues $2,477,541 $2,636,635 $2,785,464 $2,984,859
Cost of
revenues 1,654,419 1,657,024 1,902,308 1,992,980
Netflix. Inc
Balance Sheet
December 1, 2018
( In$thousands) Assets December 31, March 31, June 30, September 30,
2017 2018 2018 2018
Current assets:
Cash and cash equivalents $ 2,822,795 $2,593,666 $3,906,357 $3,067,534
Short-term investments - - - -
Total assets $ 19,012,742 $20,152,797 $22,663,537 $ 23,366,229
Equity
Long-term debt 6,499,432 6,542,373 8,342,067 8,336,586
Common stock 1,871,396 1,995,225 2,103,437 2,215,736
Accumulated other
comprehensive income (loss) (20,557) 4,264 (12,427) (14,508)
Retained earnings 1,731,117 2,021,241 2,405,590 2,808,425
53
Netflix. Inc
Income Statement
December 1, 2018
(in $thousands) September

2017 2018 2018 2018
Revenues $3,285,755 $3,700,856 $3,907,270 $3,999,374
Cost of
revenues 2,107,354 2,196,075 2,289,867 2,412,346
54
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56
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Professor: Dr. Yogendra Prasad Acharya

Group 6: Research Project

Alexandra Faye Steinberg*

Due Date: November 28, 2018

2.1 What is Our Research Interest?

increasingly competitive market is worth investigating.

2.2 What Do We Already Know?

streaming subscribers worldwide (Disis, 2018).

other significant causes of stock price variations.

2.3 What do others know?

content and high-quality award campaigns” (Walters, 2018, 1).

(Kunert, 2018, 1).

liquidity and its potential areas of improvement.

capitalization as reflected in its stock prices.

3.1 Who are the participants?

of the data and analysis.

3.2Where did the study take place?

made, assignments, and issues - can be seen in Appendix B.

operational liquidity components and stock prices.

3.4How Did the Action Unfold?

inferred. Consequently, we deemed it ineffective to attempt to conduct a scenario analysis as according to

to subsequent collaborative research work.

4.1 How Did We Record Observations?

4.2 What Did We Observe?

i. Quarterly Operational Liquidity

measure (cash conversion cycle (CCC)) was amended to simply:

Excel and we retained two decimals throughout for consistency.

Date of Accounts Cost of Goods Accounting Days Payables Cash

Financial Payable Sold Days Outstanding Conversion

Statement ($1000USD) ($1000USD) Cycle (Days)

January 2014 $108,435 $820,677 92 12.16 days -12.16 days

April 2014 $133,833 $869,186 90 13.86 days -13.86 days

July 2014 $137,226 $914,848 91 13.65 days -13.65 days

October 2014 $150,374 $954,394 92 14.50 days -14.50 days

January 2015 $201,581 $1,014,332 92 18.28 days - 18.28 days

April 2015 $190,567 $1,046,401 90 16.39 days -16.39 days

July 2015 $211,729 $1,121,752 91 17.18 days - 17.18 days

October 2015 $209,365 $1,173,958 92 16.41 days -16.41 days

January 2016 $253,491 $1,249.365 92 18.67 days -18.67 days

April 2016 $231,914 $1,369,540 91 15.41 days -15.41 days

July 2016 $240,458 $1,473,098 91 14.85 days -14.85 days

October 2016 $285,753 $1,532.844 92 17.15 days -17.15 days

January 2017 $312,842 $1,654,419 92 17.40 days - 17.40 days

April 2017 $294,831 $1,657,024 90 16.01 days - 16.01 days

July 2017 $273,398 $1,902,308 91 13.08 days - 13.08 days

October 2017 $301,443 $1,992,980 92 13.92 days - 13.92 days

January 2018 $359,555 $2,107,354 92 15.70 days - 15.70 days

April 2018 $436,183 $2,196,075 90 17.86 days - 17.86 days

July 2018 $448,219 $2,289,867 91 17.81 days - 17.81 days

October 2018 $441,427 $2,412,346 92 16.83 days - 16.83 days

Netflix Inc's Cash Conversion Cycle: January 2014 to October

y = 2E-17x6 - 6E-12x5 + 7E-07x4 - 0.0372x3 + 1184.3x2 - 2E+07x + 1E+11

rate of return to incorporate the assumption of compounding.

the NASDAQ values for the same time period.

NASDAQ data for the same period.

to its equivalent NASDAQ values as presented in Table 11.

Date Adj Close R(t) Variance Standard Deviation

Date Adj Close R(t) Variance Standard Deviation

traditional portfolio theory.

analysis using Excel Solver’s Data Regression Analysis to investigate further.