Aswath Damodaran – Session 15 (MBA): Netflix (NFLX) Case and Closing the Books on Investment Analysis

Aswath Damodaran – Session 15 (MBA): Netflix Inc (NFLX) Case and Closing the Books on Investment Analysis

Published on Mar 30, 2016

The bulk of today’s class was spent on the Netflix Studio case. While the case itself will soon be forgotten (as it should), I hope that some of the issues that we talked about today stay fresh. I have put the presentation and excel spreadsheet with my numbers online:
Presentation: http://www.stern.nyu.edu/~adamodar/pd…
Excel spreadsheet with analysis: http://www.stern.nyu.edu/~adamodar/pd…
Please download them.

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In the last part of the class, we tied up some loose ends relating to investment analysis, starting with valuing side benefits and synergies and then taking a big picture perspective of the options that are often embedded in project analysis that may lead us to take negative NPV investments.
Slides:
http://www.stern.nyu.edu/~adamodar/po...
Post class test: http://www.stern.nyu.edu/~adamodar/pd...
Post class test solution: http://www.stern.nyu.edu/~adamodar/pd...

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The cost of capital for the cash flows from the studio, reflecting its risk (content production) and its focus (international) is 10.56%. The cost of capital for cost savings in the US, reflecting its risk and focus is 10.09%.

¨ This project is a good project even without the side benefits of cost savings and becomes even better if you include those benefits. ¤

The average return on capital, in the finite life case, is 27.94%, without counting synergy, and is 30.67%, with the cost savings counted in. ¤

The net present value of the cash flows the studio, using the 10.56% cost of capital n Is $386.22 million, under the finite life assumption of a of 10 years.

Adding the present value of cost savings adds $123.42 million to that NPV yielding a total NPV of $509.64 million n Is $1888.19 million, under the assumption of an infinite life.

Adding the present value of cost savings adds $228.01 million to that NPV to yield a total NPV of $2,116.20 billion

 The IRR exceeds the cost of capital in both cases. ¨ I would accept the studio investment. Not only does it generate added value on a stand alone basis, but Netflix could use the added subscriber base to find ways to augment value in the future.

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Please note that I do not read comments posted here, nor respond to messages here. I don't have the time. If you want my attention, you must seek it directly at my blog. Aswath Damodaran is the Kerschner Family Chair Professor of Finance at the Stern School of Business at New York University. He teaches the corporate finance and equity valuation courses in the MBA program. He received his MBA and Ph.D from the University of California at Los Angeles. His research interests lie in valuation, portfolio management and applied corporate finance. He has written three books on equity valuation (Damodaran on Valuation, Investment Valuation, The Dark Side of Valuation) and two on corporate finance (Corporate Finance: Theory and Practice, Applied Corporate Finance: A User’s Manual). He has co-edited a book on investment management with Peter Bernstein (Investment Management) and has a book on investment philosophies (Investment Philosophies). His newest book on portfolio management is titled Investment Fables and was released in 2004. His latest book is on the relationship between risk and value, and takes a big picture view of how businesses should deal with risk, and was published in 2007. He was a visiting lecturer at the University of California, Berkeley, from 1984 to 1986, where he received the Earl Cheit Outstanding Teaching Award in 1985. He has been at NYU since 1986, received the Stern School of Business Excellence in Teaching Award (awarded by the graduating class) in 1988, 1991, 1992, 1999, 2001, 2007, 2008 and 2009, and was the youngest winner of the University-wide Distinguished Teaching Award (in 1990). He was profiled in Business Week as one of the top twelve business school professors in the United States in 1994.