Albert Fried & Company, LLC

Institutional Reductive Research NETFLIX Inc. NYSE: NFLX

Rich Tullo Director of Research (212) 422 7282 x260 rtullo@albertfried.com January 24, 2013

PRICE TARGET - $68

As NFLX Ads 5.4 million Subs in 2012 Content Obligations Expand to $5.6 billion ($94.9 per share) from $5 billion ($91 per share); We Suggest Selling NFLX shares On Strength; Maintain Under Weight and $68 Target

Thesis: We think the NFLX Bull Story has transitioned from a questionable takeover story to an untenable content liability growth story. Thus we still think the shares are significantly overvalued and should be sold.

Key Levers:
While NFLXs results were mixed versus our estimates, we underestimated the influence of low peer estimates to manufacture an earnings beat given NFLXs short interest. NFLX posted 2012A EPS of $0.29 per share as compared to our $0.27 per share estimate which was among the highest of our peers. Revenue and net sub additions in 2012A were $3.609 billion on 5.77 million additional subs as compared to our $3.614 billion and 6 million additions estimates for revenue and subscribers respectively. We expected a strong quarter for NFLX and we got one, however we still think NFLXs escalating content liabilities to $5.6 billion in 4Q12 from $5 billion in 3Q12 creates an earnings headwind and or potential shareholder dilution. On the upbeat earnings conference call CEO Reed Hastings suggested the company would refinance $200 million of its current debt and perhaps raise additional funds. We estimate NFLX has approximately $3 billion in content liabilities due over the next 24 months. And we expect NFLX will need to raise at least $1.4 billion to meet its current content obligations and also refinance its debt while keeping approximately $200 million in cash on its balance sheet to meet working capital needs. As the Free-Cash-Outflow (-$67 million; defined as Cash-From Operations less CAPEX and Cash Content Acquisitions) is significantly less than net income $17.1 million in 2012A, we think NFLXs earnings quality is poor and should be a red flag to investors. In our view, as content liabilities escalate to $5.6 billion NFLX will need to raise debt and or equity capital thus we expect either earnings and or shareholder value to be diluted in 1H13E as the window for raising cheap debt is closing as the economy improves. To put NFLXs rapidly escalating content liability into perspective it now stands at roughly $81 per subscriber by our estimate in 2012A up from roughly $13 per sub in 2010A. We will have exact figures when NFLX issues its SEC form 10K. We think as reflected in FreeCash-Flow, increased cost capitalization is masking fundamental weakness. While NFLX provides good optics in its results posting, as revenue per sub rises to $8.07 per sub per month and total costs to $8.06 in 2012A as compared to $7.71 and $8.03 for revenue and costs per sub respectively in 2011A. The capitalization of a greater per sub portion of NFLXs content expense cannot be masked as it is reflected in the roughly 12% rise in content liabilities to $5.6 billion from $5 billion. While our estimates are still under review our 1Q13E estimates are unchanged. We will provide a follow up note as we update our model. See next page.

Underweight
Previous Close
52 wk High/52 wk Low Avg. Vol - 10 Day (mm)

139.00
133.43-52.81

3.839 8201.00 59.0 87.0% 47.0% NA 85.3x 35x 0.68

Market Cap (mm) Shares Out. (mm) Float % Shares Short (% Float) Dividend Yield % PE 'CY16 EV/AOCF '16 Beta

Estimates Revenue (mm)

2011A 2012A 2013E $3,204.5 $3,609.3 $4,034.5

Earnings
2011 1Q12A 2Q12A 3Q12A 4Q12A 2012E 2013E $4.16 ($0.08) $0.11 $0.13 $0.13 $0.29 $0.75

Risks to Bear Thesis:

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

Price Target

NFLX is currently trading at 54x (EV/AOCF) our 2016E AOCF estimate of $270 million. We derive our $68 price target by applying a 12.5% discount rate to NFLXs forward 3 year intrinsic exit value of $97 as reflected by applying a 35x multiple to NFLXs forward to 2016E AOCF. We think our current Target, which is 50% below the trading price is aggressive but reasonable. As we apply a 50% premium to NFLXs current cost of debt capital, we think our discount rate is in the right ballpark. Negative net cash flow and few tangible assets once its non-cash debts to Hollywood are taken into account generate a high potential cost of capital in our view.

GAAP EPS includes non-cash executive compensation under FASB 123R, sum of quarterly estimates may not add to annual due to rounding and shares differences

See important notes, disclosures and disclaimers on page 11-14 before making investment decisions.1

Netflix Variance Table

In millions except per share figures

2012A

2012E

Var

2011A

Y/Y %

Revenue Operating Income

Operating Margin %

3,609,282 49,992
1.4%

$ 3,614,601 43,380
1.2%

$ $ $ $

(5,319) 6,612 119,592 0.02 (0.23)

$3,204,577 385,068
12.0%

12.63% -87.0% -93.3% -93.03%

AOCF
Margin %

28,629
0.8%

(90,963)
-2.5%

429,492
13.4%

Diluted EPS-GAAP Total Net Subscriber Additions

Source:Albert Fried and Company LLC.

0.29 4Q12A 5.77

0.27 4Q12E 6.00

4.16

In Table I. above: At $3.609 billion versus our estimate of $3.614 billion, NFLX 2012 revenue posted below our estimate,. Owing to lower content costs versus our model (due to increased expense capitalization in our view) operating income $49.9 million beat our $43.4 million estimate. Due to; fewer content cash outflows, the escalation of the content liability ($162 million vs. $191 million in our model), greater non-cash equity compensation ($65 million vs. $60 million), and a higher tax rate AOCF was $28 million as compared to our $90.9 million outflow estimate. On an EPS basis NFLX EPS $0.29 per share beat our estimate $0.27 per share. We expected strong sub additions, owing to the growth in mobile device sales during the holiday season and NFLX missed our 6 million sub additions estimate by posting 5.77 million net additions.

Netflix Guidance Variance Table

In millions except per share figures

Mid-Range Guidance 1Q13G

Our estimate 1Q13E

Var

1Q12A

Y/Y %

Revenue Operating Income

Operating Margin %

1,018 NA NA 0.12 1Q13G 41.3

1,051 11.2
1.1%

(33) NA NA

870 (1,935) 21,170 (0.08)

16.98% NM NM NM

AOCF
Margin %

(13)
-1.2%

Diluted EPS-GAAP Total Net Subscribers

Source:Albert Fried and Company LLC.

0.14 1Q13E 44.60

(0.02) (3.30)

Table II Above NFLX revenue guidance was slightly below our estimate at $1.018 billion as compared to our current $1.051 billion estimate. In our view its hard to see how NFLXs new drama ,The House of Cards, will do more than create good buzz for NFLX as the target market for the House of Cards overlaps audiences for shows such s the Walking Dead and Mad Men. Our channel checks suggest that Kevin Spacey, the show lead actor, may draw fewer than $1 million net new subs as he on average generates $10 million (1 million tickets) in movie box office according IMBD data. Thus our total net subscribers estimate $44.6 million, contemplates a strong lift from the House of Cards.

See important notes, disclosures and disclaimers on page 11-14 before making investment decisions.2

Revenue Per Average Sub Source Albert Fried and Company and Company Reports
$8.20 2012 $8.07

$8.10

$8.00

$7.90

$7.80 2011 $7.71 $7.70 2010 $7.58

$7.60

$7.50

$7.40

$7.30

Chart I NFLXs revenue per sub has increased to $8.07 per sub from $7.58 per sub as NFLX has added new subscribers.

See important notes, disclosures and disclaimers on page 11-14 before making investment decisions.3

Total Costs Per Average Sub Source: Albert Fried and Company and Company Reports

$8.10 2011 $8.03

2012 $8.06

$8.05

$8.00

$7.95

$7.90

$7.85 2010 $7.78

$7.80

$7.75

$7.70

$7.65

$7.60

Chart II Total costs per sub grow less than revenue owing to increased cost capitalization in our view

See important notes, disclosures and disclaimers on page 11-14 before making investment decisions.4

Projected Interest Expense Per Share (59mm) 40% Tax Rate Source Albert Fried and Company Estimates

$0.80 5% Rate $0.72 $0.70

$0.60 3.5% Rate $0.50 $0.50

$0.40

$0.30

$0.20

$0.10

$-

Chart VI At rates of 3.5% and 5% we expect the income headwind from a fresh debt capital raise to be in the range of $0.50 to $0.72 per share respectively in the first twelve months following the deal.

See important notes, disclosures and disclaimers on page 11-14 before making investment decisions.5

NFLX On Blance Sheet Content Obligation Per Average Sub Source: Albert Fried and Company and Company Reports
$90.00 2012 $81.61 $80.00

$70.00

$60.00 2011 $48.32

$50.00

$40.00

$30.00

$20.00

2010 $12.82

$10.00

$-

Chart III Owing to increased capitalization of expenses, in our view, NFLXs content obligation per sub dramatically expands year-over-year to $81.6 per in 2012 A sub from $48.42 per sub in 2011A. At $8.07 in revenue per sub the content liability is equal to 10 months of revenue as compared to 6 months of revenue in 2011 and 1.7 months in 2010.

See important notes, disclosures and disclaimers on page 11-14 before making investment decisions.6

Projected 1H2013E Capital Requirement Source; Albert Fried and Company Estimate
$1,600,000 $1,409,060 $1,400,000

$1,200,000

$1,000,000

$800,000

$600,000

$400,000

$200,000

$-

Chart IV We project NFLX will need to secure at least $1.4 billion in fresh Capital to meet its roughly $3 billion in content obligations due in 2013E and 2014E.

See important notes, disclosures and disclaimers on page 11-14 before making investment decisions.7

Netflix, Inc. (NasdaqGS:NFLX) > Financials > Key Stats

In Millions of the trading currency, except per share items. Currency: Order: Decimals: Trading Currency Latest on Right Capital IQ (Default) Conversion: Today's Spot Rate Units: S&P Capital IQ (Default)

Key Financials For the Fiscal Period Ending Currency Total Revenue Growth Over Prior Year Gross Profit Margin % AOCF I Margin % Operating Income Margin % Net Income Margin % Diluted EPS Excl. Extra Items Growth Over Prior Year

2010E

2011E

2012E

2013E

2014E

2015E

2016E

2017E

2018E

2019E

2020E

USD 2,162.6 29.5% 805.3 37.2% 412.4 19.1% 283.6 13.1% 160.9 7.4% $2.96 49.5%

USD 3,204.6 48.2% 1,164.7 36.3% 429.5 13.4% 385.1 12.0% 235.1 7.3% $4.16 40.5%

USD 3609.3 12.6% 983.41 (15.6%) (84.4) (2.3%) 50.0 1.4% 17.2 0.5% $0.29 (93.0%)

USD 4034.5 11.8% 1237.3 25.8% (23.1) (0.6%) 96.9 2.4% 53.9 1.3% $0.75 158.1%

USD 4158.7 3.1% 981.1 (20.7%) (279.8) (6.7%) -89.8 (2.2%) -158.3 (3.8%) ($2.18) NM

USD 4235.6 1.8% 1184.8 20.8% (119.6) (2.8%) 70.4 1.7% -23.7 (0.6%) ($0.37) NM

USD 4488.6 6.0% 1184.8 0.0% 80.2 1.8% 270.2 6.0% 126.1 2.8% $1.36 NM

USD 4772.9 6.3% 1688.4 42.5% 265.4 5.6% 455.4 9.5% 365.4 7.7% $3.63 NM

USD 4926.9 3.2% 1843.6 9.2% 380.5 7.7% 570.5 11.6% 480.5 9.8% $3.95 9.0%

USD 4866.9 -1.2% 1869.5 1.4% 421.8 8.7% 611.8 12.6% 521.8 10.7% $3.92 (0.8%)

USD 4612.0 -5.2% 1770.1 (5.3%) 388.6 8.4% 578.6 12.5% 488.6 10.6% $3.38 (13.9%)

All results are taken from the most recently filed statement for each period. When there has been more than one, earlier filings can be viewed on the individual statement pages. Growth rates for the LTM period are calculated against the LTM period ending 12 months before.

1000

Latest Capitalization (Millions of USD) Currency Share Price as of Jan-16-2013 Shares Out. Market Capitalization** - Cash & Short Term Investments + Total Debt + Pref. Equity +On Balance Sheet Liabilities +Off Balance Sheet Liabilities + Total Minority Interest = Total Enterprise Value (TEV)

2010E USD $97.48 55.5 5,414.6 798 400 355.8 75 5,845.3

2011E USD $97.48 55.5 5,414.6 798 400 2,311.9 2300 10,026.4

2012E USD $97.48 55.5 5,414.6 798 400 2,311.9 4,923.0 12,649.4 1,116.8

2013E USD $97.48 58.9 5,742 1507.5 1400 2,534.7 2,079.0 10,355.6

2014E USD $97.48 72.2 7,034 1439.2 1400 2,139.7 1,679 10,852.8

2015E USD $97.48 76.209 7,429 1030.5 1400 1,674.9 1200 10,303.7

2016E USD $97.48 87.709 8,550 1021.6 1400 1,524.9 1800 11,874.8

2017E USD $139.0 109.709 15,250 972.1 1400 1,374.9 2400 19,024.4

2018E USD $139.0 121.209 16,848 1477.6 1000 1,224.9 2600 20,672.9

2019E USD $139.0 132.709 18,447 1409.4 1000 1,074.9 2800 22,321.4

2020E USD $139.0 144.209 20,045 2103.0 800 0 3000 23,045.1

= Total Capital Note: Striped area represents the impact of negative Net Liability on Market Cap. Total Liability includes Total Debt, Minority Interest and Pref. Equity. Net Liability includes Total Liability, net of Cash and Short Term Investments. TEV includes Market Cap and Net Liability. Total Capital includes Common Equity and Total Liability. Valuation Multiples based on Latest Capitalization For the Fiscal Period Ending TEV/Total Revenue TEV/AOCF I TEV/Operating Income P/Diluted EPS Before Extra 2010E 2.7x 14.2x 20.6x 32.9x 2011E 3.1x 23.3x 26.0x 23.4x

2012E 3.5x -150.0x 253.0x 336.5x

2013E 2.6x -448.3x 106.9x 130.4x

2014E 2.6x -38.8x -120.8x -44.6x

2015E 2.4x -86.2x 146.3x -265.5x

2016E 2.6x 148.1x 44.0x 71.5x

2017E 4.0x 71.7x 41.8x 38.3x

2018E 4.2x 54.3x 36.2x 35.2x

2019E 4.6x 52.9x 36.5x 35.4x

2020E 5.0x 59.3x 39.8x 41.2x

Financial data provided by Source: Albert Fried and Company LLC.

See important notes, disclosures and disclaimers on page 11-14 before making investment decisions.8

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

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

About Adjusted Operating Cash Flow (AOCF) AOCF is a NON-GAAP measure of income similar to EBITDA (Earning before interest, taxes, depreciation and amortization expense). We define AOCF as; operating income less depreciation, amortization and non-cash executive compensation. We like AOCF as it provides a standard measure of earnings and value across a large spectrum of the Technology, Media and Telecommunications universe we cover. As we cover securities which have significant non-cash costs and or significant differences in capital structures, even within industry peers, we use Enterprise Value-to-AOCF (EBITDA) as a primary valuation method in most of our coverage universe. We define Enterprise-Value (EV) as Market Capitalization less Cash, plus Debt and we exclude minority interest as minority interest income and or expense is typically excluded from our AOCF calculations. Moreover, in several Companies we follow options exist to PUT (Buy) Minority interest to the parent on favorable terms which may or may not add value in an acquisition scenario. Companies we follow may, in Company reports, use there own definitions of AOCF or similar measures such as AOI, EBITDA or Company share of EBITDA which may differ materially from our AOCF measure. We maintain no obligation to either reconcile our measure to company metrics or reconcile to GAAP Measures.

See important notes, disclosures and disclaimers on page 11-14 before making investment decisions.9

Albert Fried & Company, LLC Institutional Reductive Research

Netflix, Inc. (NasdaqGS:NFLX) - 3 YR. Share Pricing 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00

Date Rating Price Target

1) Additional Information Rating Action New Trading Target Action None Report Type Trading Note

Ja n1 M 9 -2 ar 0 1 -0 0 A p 4- 2 r- 1 0 1 0 J u 9 -2 0 n0 10 J u 2 -2 0 l -1 1 0 A u 6- 2 g- 01 0 3 O c 0 -2 t- 1 010 N o 3 -2 0 v -2 1 0 J a 6 -2 n- 01 1 0 F e 1 -2 b- 0 1 1 2 A p 5- 2 r- 1 0 1 1 M 1 -2 ay 01 -2 5 1 J u - 20 l -1 1 1 A u 1- 2 g- 01 1 2 O c 3 -2 t- 0 011 N o 6 -2 0 v -1 1 1 J a 8 -2 n- 01 0 1 F e 5 -2 b- 0 1 2 2 A p 1- 2 r- 0 0 1 2 M 4 -2 ay 01 -1 8 2 J u - 20 l -0 1 2 A u 3- 2 g- 01 2 1 O c 6 -2 t- 0 012 N o 1 -2 0 v -1 1 2 J a 5 -2 n- 01 02 2 -2 01 3

Netflix, Inc. (NasdaqGS:NFLX) - Share Pricing

11/16/2012 Trade UW $81.00 None

01/17/2013 Underweight $97.27 $68.00

Re-Initiation Initiation Report

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Research at Albert Fried & Company LLC Copyright 2012

IMPORTANT DISCLOSURES Albert Fried & Company LLC, produces a variety of analytics and research products, including but not limited to fundamental analysis, equity linked trading desk analytics, quantitative analysis, market commentary reports, fixed income, and trade ideas. Certain products may be exempt from FINRA rule 2711. Recommendations contained in one type of analytics product may differ from recommendations contained in other types of analytics products, whether as a result of differing time horizons, methodologies, or otherwise. Albert Fried & Company LLC, does not provide investment banking services and is not expected to provide investment banking services in subject securities. Businesses operated by Albert Fried & Company LLC, may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Guide to Albert Fried Fundamental Equity Research Rating System Stock Rating 1) OVERWEIGHT suggests capital appreciation to our 12 to 18 Month Price Target of at least 30% from the price on the initiation or upgrade date of coverage. 2) MARKET PERFORM denotes less than 30% upside but greater than 10% upside to our 12 to 18 Month Price Target on the initiation or upgrade date of coverage. 3) UNDERWEIGHT suggests price appreciation of 10% or less from the price on the initiation or downgrade date of coverage over the next 12-18 month period 4) NC, denotes Not Covered. Distribution of ratings system Albert Fried & Company LLC provides fundamental research on 15 companies, of which 7 (47%) are rated OVERWEIGHT, 4 (27%) are rated Market Perform and 3 (20%) rated UNDERWEIGHT

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