November 12, 2010

Netflix Inc
NASD: NFLX - Internet Retail

Grade

Earnings Last Earnings Release Last Qtr. Actual vs. Est. Next Release 01/24/2011 Year Ending 12/31/2011

Quick Facts 10/20/2010 Dividend Yield $0.70 / $0.71 52 Wk High N/A 52 Wk Low $2.79 Short Interest $0.71 Market Cap N/A $178.50 $49.13 27% of float $9.2B

72.7
Rated 'BUY' since Apr 4th, 2007

$175.1
11/11/2010

Year Ending 12/31/2010

Overview
Company Scores Very Good Fundamental Grades MarketGrader currently has a BUY rating on Netflix Inc (NFLX), based on a final overall grade of 72.7 scored by the company's fundamental analysis. Netflix Inc scores at the 96th percentile among all 5741 North American equities currently followed by MarketGrader. Our present rating dates to April 4, 2007, when it was N/A from a . Relative to the Internet Retail sub-industry, which is comprised of 22 companies, Netflix Inc's grade of 72.7 ranks third. The industry grade leader is Amazon.com Inc (AMZN) with an overall grade of 73.6. The stock, up 52.8% in the last six months, has outperformed both the Internet Retail group, up 0.66% and the S&P 500 Index, which has returned 5.91% in the same period. Please go to pages two and three of this report for a complete breakdown of NFLX's fundamental analysis.

Price, Rating and Sentiment History - 2 Years

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November 12, 2010

Netflix Inc
NASD: NFLX - Internet Retail

72.7
The Company's Financials Show Very Solid Top and Bottom Line Growth in the Short and Long Term

Growth
Market Growth LT Market Growth ST Rel. Price Strength Growth Potential Earnings Momentum Earnings Surprise

AB+ A+ B AA+ B+

Netflix booked $2.01 billion in total revenue during the 12 month period ended last quarter, 70.41% higher than the equivalent period ended three years ago, when total revenue was $1.18 billion. This already-healthy top line growth trend seems to have accelerated recently based on the company's revenue of $553.22 million reported in its latest quarter, 30.75% above the $423.12 million in total sales posted during the same quarter a year earlier. A few more quarters of such strong growth will eventually translate into a higher long term growth rate, positively impacting some of Netflix's growth grades. If, on the other hand, growth tapers off moderately, the company's long term sales growth is likely to remain at current levels, not a bad thing at all. Also based on its latest report, profits grew very strongly last quarter when compared to the year earlier period and when measuring full year results against those of three years ago. Its net income rose 25.96% to $37.97 million in its most recent quarter from $30.14 million (excluding extraordinary items) in the year earlier period, while full year profit for the 12 months ended on September 30, 2010 of $144.67 million was 119.94% higher than full year net of $65.78 million reported three years earlier. The company's consistent margin expansion slowed down a little in its latest quarter, with EBITDA, operating and net margins increasing an average 8.89% compared to the year earlier period. On October 20, 2010 the company reported first quarter earnings that were 1.00% below the consensus estimate;however, the stock soared 15.64%, an indication investors see a healthy picture for future earnings growth. Despite the recent earnings miss, Netflix's earnings surprise trend is positive, having beaten the consensus estimate by 11.00%, on average, with its last six reports; and judging by the positive effect on the stock price after the last report, investors apparently expect the trend to continue.

Revenue Qtrly. 09/30/2010 Revenue Qtrly. Year Ago Revenue 1 Yr. Chg. Revenue 12 Mo. Tr. Latest Revenue 12 Mo. Tr. 3Y Ago Revenue 12 Mo. Tr. 3Y Chg.

$553M $423M 30.75% $2B $1.2B 70.41%

Net Income Qtrly. 09/30/2010 Net Income Qtrly. Year Ago Net Income 1 Yr. Chg. Net Income 12 Mo. Tr. Latest Net Income 12 Mo. Tr. 3Y Ago Net Income 12 Mo. Tr. 3Y Chg.

$38M $30M 25.96% $145M $66M 119.94%

Value
Capital Structure P/E Analysis Price/Book Ratio Price/Cash Flow Ratio Price/Sales Ratio Market Value

D
F AF C F F

Valuation Seems Very Rich Regardless of Company's Positive Fundamentals

Netflix's stock, currently priced at 63.69 times 12-month trailing earnings per share, trades at a 32.92% discount to our "optimum" P/E ratio of 94.95. This is calculated by MarketGrader based on the company's EPS growth rate in the last two years, using reported quarterly figures. By this measure, Netflix's earnings per share have increased at an annualized rate of 40.30% in the last two years. The combination of such a high growth rate with an apparent margin expansion probably means the company has been gaining market share in recent quarters without sacrificing financial performance, evidenced by its superior overall Profitability grade. This combination offers a strong case for future gains in the stock price. The stock's forward P/E of 62.77, based on its earnings estimate for the next four quarters, represents a premium to the S&P 500 index's forward P/E of 15.20 but is lower than its trailing P/E of 63.69. Therefore value could apparently be found in the company's future earnings growth even though relative to the market the stock might not seem cheap (the fundamentals may already be factored into the price). But assuming the company remains fundamentally strong, the stock might have further room to run, or at least be a relatively safe place to be if earnings estimates materialize into actual reported results. Netflix current market value is 49.20 times its total book value, a very rich multiple. When subtracting intangible assets such as goodwill--which account for 0.00% of total stockholders' equity--from total assets, the price to book ratio jumps to 49.20, an excessive multiple. From a cash flow perspective the shares look pricey considering investors are paying 33.08 times the $5.29 in cash flow per share generated by the company in the last twelve months. This is a significant premium even if the company's fundamentals look generally strong. Based on its price to sales ratio of 4.55, its shares trade at a sizable 54.38% premium to the Internet Retail average of 2.95 times trailing 12-month sales. Finally, from a value perspective, we look at how much bigger the company's market capitalization is than its latest operating profits after subtracting taxes. By this measure Netflix's $9.15 billion market cap is excessively high considering it is 73.93 times its most recently reported net income plus depreciation (added back since it's a non-cash charge).

P/E Ratio 12 Mo. Tr. 09/30/2010 Optimum P/E Ratio Forward P/E Ratio S&P 500 Forward P/E Ratio Price to (Tangible) Book Ratio Price-to-Cash Flow Ratio Price/Sales Ratio

63.69 94.95 62.77 15.20 49.20 33.08 4.55

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November 12, 2010

Netflix Inc
NASD: NFLX - Internet Retail

72.7
Company's Operations Are Very Profitable and Indicate a Solid Business Environment

Profitability
Asset Utilization Capital Utilization Operating Margins Relative Margins Return on Equity Quality of Revenues

AA A+ B A+ A+ B-

Netflix is a very profitable company, with an operating margin that exceeds its sub-industry average and an excellent return on shareholder equity, an important part of our analysis. During the last 12 months it booked as net profits 7.19% of its total sales, or $144.67 million, an acceptable net profit margin. The Internet Retail sub-industry had an average operating margin of 7.88% in the period. The company's operating margin of 12.53% exceeded that average by 51.08%. Netflix's return on equity, based on trailing 12-month earnings, is not only outstanding at 75.36%, but it's higher than the 46.37% return on equity from the year earlier period. This is an important metric of management efficiency in our grading system, as it measures the amount earned on an investment in the company's common stock. The company's capital structure is pretty conservative relative to its recent performance, with a debt to equity ratio of just 1.23. Its long term debt accounts for 55.00% ot total capital, a very manageable level. Netflix's $555.86 million in twelve month trailing core earnings, or EBITDA, shows a remarkable increase of 33.67% from the twelve months ended a year earlier, in which its core operations generated $415.84 million. EBITDA is used to measure the company's true earnings power by including interest costs, income taxes, depreciation and amortization, all non-operating charges, which are nevertheless accounted for in several EPS and net income measures of our fundamental analysis.

Cash Flow
Cash Flow Growth EBIDTA Margin Debt/Cash Flow Ratio Interest Cov. Capacity Economic Value Retention Rate

AF B A+ B+ A+ A+

Company's Cash Flow Indicators Are Solid Across the Board but Offer Some Room for Improvement

Netflix' cash flow fell considerably during the latest quarter to $42.23 million, a 46.08% decline from the $78.31 million reported after the same quarter last year. What's more important and worth highlighting is the fact that up to the most recent quarter the company's twelve month trailing cash flow was growing very healthily, up 4.18% compared to the same period ended a year before. This marks a sharp slowdown in the company's business environment and is likely to put considerable pressure on its margins. Even though the company has $236.69 million in total debt, its net debt is virtually zero since it has $256.81 million in cash on hand; and since it generated $154.09 million in earnings before interest, taxes, depreciation and amortization last quarter, it's safe to say its liquidity is remarkable. Therefore the company's debt is not only very manageable with its own cash flow but could be increased if it wanted to pursue strategic growth opportunities. The company also has the ability to enhance shareholder returns through dividends or by repurchasing its own shares, boosting the future value of its earnings. The current amount of cash and equivalents it has on hand is 65.19% higher than a year ago when it had $155.46 million; while in this same period its leverage also increased, with total debt as a percentage of total capital climbing from 14.15% to 55.22% today, the company's cash on hand is still larger than its debt. Our Economic Value indicator is another gauge used by MarketGrader to measure how efficiently management employs the capital invested in the business. As of last quarter, Netflix's had $426.63 million in total invested capital, which included all common and preferred equity as well as long term debt. The weighted after tax cost of each part of the capital structure was roughly the same, with a 2.55% total cost of equity and 2.70% cost of debt, both adding up to a total 5.25% after tax cost of capital. The company's return on invested capital, based on its 12-month trailing operating income was 59.05% following the latest quarterly report, which means that after subtracting the total cost of capital mentioned above, Netflix's generated 53.80% in economic value added during the same period, a very strong return. This could be considered as the company's true economic profit in the last year since it accounts not only for the costs of running the business (operating) but also the cost of the capital it employed. Netflix does not pay a dividend and hasn't done so within at least the last five years.

Cash Flow Qtrly. 09/30/2010 Cash Flow Qtrly Year Ago Cash Flow 1 Yr. Chg. Cash Flow 12 Mo. Tr. Latest Cash Flow 12 Mo. Tr. 3Y Ago Cash Flow 12 Mo. Tr. 3Y Chg. Free Cash Flow Last Qtr.

$42M $78M (46.08%) $286M $293M (2.51%) $4.98M

Economic Value Total Invested Capital Return on Inv. Capital Weighted Cost of Equity Weighted Cost of Debt Total Cost of Capital Economic Value Added $429M 59.05% 2.55% 2.70% 5.25% 53.80%

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November 12, 2010

Netflix Inc
NASD: NFLX - Internet Retail

72.7
Key Facts: 100 Winchester Cir Los Gatos ,CA USA 95032-1815 Phone:408-540-3700 www.netflix.com Biggest Company in Sub-Industry Amazon.com Inc (AMZN) Grade 73.6 Market Cap:$76.50 billion

Profile
Netflix, Inc. provides online movie rental subscription services in the United States. The company offers its subscribers access to a library of movie, television, and other filmed entertainment titles on digital versatile disc (DVD). Its members can get DVDs delivered to their homes and can instantly watch movies and TV episodes streamed to their TVs and PCs. As of December 31, 2009, Netflix served approximately 12 million subscribers. It also partners with consumer electronics companies to offer a range of devices that can instantly stream movies and TV episodes to members' TVs from Netflix. The company was founded in 1997 and is headquartered in Los Gatos, California.

Smallest Company in Sub-Industry BIDZ.com Inc (BIDZ) Grade 23.2 Market Cap:$29.02 million

MarketGrader Dilution Analysis

Impact of Change in Shares on EPS - Q4 2010
Dilution Summary

Income Statement
Revenue $0.70 $0.52 35% 54 58 (7%) $0.66 26% $0.05 *EPS Op. Income Net Income *EPS Latest *EPS Year Ago EPS Change 1 Yr. C. Shares - Latest(M) C. Shares - Yr Ago(M) C. Shares - 1Yr Chg. EPS if Yr. Ago Shares EPS Chg. if Yr. Ago EPS Loss from Dilution

Last Qtr (09/2010) $553M $68M $38M $0.70

12 Mo. Trailing $2.0B $252M $145M $2.74M

*Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company.

Balance Sheet
Total Assets Total Debt Stockholders Eq.
All numbers in millions except EPS

Latest $770M $237M $192M

*Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company.

Ratios
Price/Earnings (12 mo. trailing) Price/Tangible Book Price/Cash Flow Price/Sales Debt/Cash Flow Return on Equity Gross Margin (12 mo. trailing) Operating Margin (12 mo. trailing) Total Assets Intangible Assets Long Term Debt Total Debt Book Value Enterprise Value $770M 0 $235M $237M $192M ($20M) Gross Margin last Qtr. EBITDA Margin last Qtr. Operating Margin last Qtr. Operating Margin Sub-Industry Avg. Operating Margin 12 mo. trailing Net Profit Margin Last Qtr. 53.25% 27.85% 12.34% 7.88% 12.53% 6.86% Net Profit Margin (12 mo. trailing) 63.69 49.20 33.08 4.55 82.90 75.36% 53.25% 12.53% 7.19%

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November 12, 2010

Netflix Inc
NASD: NFLX - Internet Retail

72.7
Ticker LINC HWG BPI STRA DV DECK ESI FLL LOPE MSN NFLX Ticker AMZN PCLN NFLX PETS SFLY NTRI EXPE NILE OSTK COA. Grade 86.90 86.42 85.37 85.31 84.71 84.47 84.22 83.07 80.00 79.82 72.67 Grade 73.60 73.17 72.67 63.55 57.94 57.78 57.38 52.23 49.58 45.27 Sentiment N N N N N P N P N N P Sentiment P P P N P N P N N N Name Lincoln Educational Services Corp Hallwood Group Inc (The) Bridgepoint Education Inc Strayer Education Inc DeVry Inc Deckers Outdoor Corp ITT Educational Services Inc Full House Resorts Inc Grand Canyon Education Inc Emerson Radio Corp Netflix Inc Name Amazon.com Inc Priceline.Com Inc Netflix Inc PetMed Express Inc Shutterfly Inc NutriSystem Inc Expedia Inc Blue Nile Inc Overstock.com Inc Coastal Contacts Inc Price $15.66 $28.99 $15.27 $143.80 $46.65 $62.04 $61.21 $3.67 $18.40 $2.08 $175.14 Price $170.37 $419.57 $175.14 $17.38 $30.75 $21.01 $27.32 $48.48 $14.30 $1.64 Next EPS 03/03/2011 11/11/2010 02/28/2011 02/07/2011 01/25/2011 02/23/2011 01/17/2011 03/24/2011 02/18/2011 11/15/2010 01/24/2011 Next EPS 01/28/2011 02/14/2011 01/24/2011 01/17/2011 01/31/2011 02/28/2011 02/10/2011 02/11/2011 03/31/2011 12/17/2010

Top Down Analysis

# 1

Consumer Discretionary Stocks in Sector: 745 Buys: 154 (20.67%) Holds: 117 (15.70%) Sells: 474 (63.62%) No. of stocks at: 52-Wk. High: 46 52-Wk. Low: 8 Above 50 & 200-day MA: 391 Below 50 & 200-day MA: 124

2 3 4 5 6 7 8 9 10 45 #

Internet Retail Stocks in Sub-Industry: 22 Buys: 4 (18.18%) Holds: 4 (18.18%) Sells: 14 (63.64%) No. of stocks at: 52-Wk. High: 0 52-Wk. Low: 0 Above 50 & 200-day MA: 11 Below 50 & 200-day MA: 5

1 2 3 4 5 6 7 8 9 10

1. Price Trend.

A+

2. Price Momentum. 4. Short Interest.

A+ D

7.8

3. Earnings Guidance. A-

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