Equity

Research

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Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors
should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision. Please see page 4 of this
report for analyst certification and important disclosure information.
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ApriI 13, 2014

Price
$326.71

Rating
UNDERPERFORM


12-Month Price Target
$175



MichaeI Pachter
(213) 688-4474
michael.pachter@wedbush.com

Nick McKay
(213) 688-4343
nick.mckay@wedbush.com

Nick Citrin
(213) 688-4495
nick.citrin@wedbush.com


Company Information
Shares Outst (M) 61
Market Cap (M) $20,029
52-Wk Range $161.80 -
$458.00
Book Value/sh $21.75
Cash/sh $11.43
Enterprise Value (M) $19,328
LT Debt/Cap 2%


Company Description
Netflix, headquartered in Los Gatos, CA, is
a leading nternet subscription service for
watching TV shows and movies.


NetfIix (NFLX)
Q1:14 Preview: House of Cards, Cost Control to Drive
Strong Start to 2014; Maintain UNDERPERFORM, $175 PT
x NetfIix wiII report Q1 resuIts after market cIose on Monday, ApriI 21, and host
a Iive video discussion at 2pm PT (webcast: youtube.com/netfIixir). The
discussion will again be moderated by two sell-side analysts.
x Q1 resuIts wiII IikeIy meet or exceed the Street's expectations, driven by
House of Cards and cost controI. Our estimates are for revenue of $1.273 billion,
vs. consensus of $1.266 billion (no guidance), and EPS of $0.82, in line with
consensus, and guidance of $0.78. We modeled domestic streaming subscriber
net adds of 2.25 million, in line with guidance, but our bias is that our estimate may
be too low based upon a high sign-up rate for season two of House of Cards, which
debuted on February 14, and low Q1 advertising spending.
x Q2 domestic streaming subscriber net adds guidance wiII IikeIy be at or
beIow Iast year's 0.63 miIIion vs. our estimate of 0.50 miIIion. Although
management will likely attribute the decline primarily to seasonality, with less
compelling exclusive content contributing to a slowdown, as Arrested Development
debuted last May. We expect Q2 EPS guidance at or above consensus of $1.00,
assuming that European expansion occurs in the second half of the year.
We beIieve Amazon's Fire TV announcement is a win for NetfIix. Amazon
listed Netflix ahead of its own Prime nstant Video ("PV) on the list of streaming
apps available for the new box. n addition, Amazon did not introduce a standalone
or ad-supported version of its streaming service. Finally, Amazon chose not to
bundle PV with Fire TV. We expect Netflix management to characterize Fire TV as
a testament to the tremendous remaining market opportunity.
x We expect management to compIain about the state of net neutraIity in the
U.S. whiIe downpIaying the financiaI impact of interconnection agreements.
n February, Netflix announced a multi-year interconnection agreement with
Comcast, with undisclosed terms, but we believe that the expense is material.
Although Netflix will likely infer that interconnections agreements largely reflect the
greed of nternet service providers ("SPs) in a deregulated market, we expect
Netflix to reach terms with the other SPs in coming years in order to minimize
throttling. Over time, we believe that interconnection agreements will force Netflix
to raise price, limiting the company's growth potential.
x Maintaining our UNDERPERFORM rating and 12-month price target of $175.
Our price target reflects a sum-of-the-parts that values domestic streaming at $140,
international streaming at $17 per share, and domestic DVD at $18 per share.

FYE Dec 2012A 2013A 2014E
REV (M) ACTUAL CURR. PREV. CONS. CURR. PREV. CONS.
Q1 Mar $870A 1,024A -- 1,273E 1,266E
Q2 Jun 889A 1,069A -- 1,338E 1,319E
Q3 Sep 905A 1,106A -- 1,366E 1,360E
Q4 Dec 945A 1,175A -- 1,424E 1,435E
Year* $3,609A 4,375A -- 5,401E 5,376E
Change 12.6% 21.2% 23.5%
2012A 2013A 2014E
EPS ACTUAL CURR. PREV. CONS. CURR. PREV. CONS.
Q1 Mar ($0.08)A 0.31A -- 0.82E 0.82E
Q2 Jun 0.11A 0.49A -- 0.93E 1.00E
Q3 Sep 0.13A 0.52A -- 0.95E 1.06E
Q4 Dec 0.13A 0.79A -- 0.99E 1.18E
Year* $0.29A 2.11A -- 3.70E 4.10E
P/E 1,109.1x 154.6x 88.3x
Change -93.1% 617.3% 75.1%
Consensus estimates are from Thomson First Call.
* Numbers may not add up due to rounding.


Source: Thomson Reuters





Michael Pachter (213) 688-4474
NetfIix | 2

RISKS
Risks to the attainment of our share price target include: a sudden increase in subscriber growth, declining competition from other
movie rental competitors, lower-than-expected costs for content, technology development and deployment, and improving
macroeconomic factors.


INVESTMENT THESIS
We believe Netflix provides a compelling service at an affordable price, and has done a phenomenal job of winning back the loyalty of
its customers since its decision to split the business over two years ago. At $7.99 per month with strong content, Netflix has been able
to grow its subscriber base far beyond our expectations of only a few years ago, and it appears that subscriber growth can be sustained
at current levels for at least another few years. The company continues to grow its international presence, but we believe it will have
difficulty turning cash-flow positive for a sustained period of time while continuing to expand its international presence, due to its large
content commitments, and we expect broadband access commitments to place greater pressure on profitability going forward. Simply
put, we do not believe that Netflix's current pricing model will allow the company to generate sustainable profits at a high level, although
it will allow for sustainable growth. n order to be sustainably profitable, we believe that Netflix must raise price, and therein lies the
dilemma: Netflix can be a high-growth, low-profit company, or it can be a low-growth, high-profit company. We do not believe that there
is room for a balance between the two, and believe that investors are overvaluing Netflix's unprofitable growth.






Michael Pachter (213) 688-4474
NetfIix | 3

INCOME STATEMENT
NetfIix Inc.
Income Statement ($ miIIions) Mar-12 Jun-12 Sep-12 Dec-12 2012 Mar-13 Jun-13 Sep-13 Dec-13 2013 Mar-14 Jun-14 Sep-14 Dec-14 2014
FiscaI Year End: December 31 Q1A Q2A Q3A Q4A FY-A Q1A Q2A Q3A Q4A FY-A Q1E Q2E Q3E Q4E FY-E
Subscription Revenues $869.8 $889.2 $905.1 $945.2 $3,609.3 $1,024.0 $1,069.4 $1,106.0 $1,175.2 $4,374.6 $1,272.8 $1,337.6 $1,366.4 $1,424.3 $5,401.2
Total cost of revenues 623.9 643.4 662.6 695.9 2,625.9 726.9 753.5 791.0 811.8 3,083.3 871.9 918.3 940.1 983.7 3,713.9
Gross profit 245.9 245.7 242.5 249.4 983.4 297.1 315.8 315.0 363.4 1,291.3 400.9 419.3 426.4 440.7 1,687.3
Technology and development 82.8 81.5 82.5 82.1 329.0 92.0 93.1 95.5 98.1 378.8 110.0 111.0 112.0 112.0 445.0
Marketing 135.9 118.2 113.2 117.4 484.7 129.2 121.8 116.1 136.8 503.9 141.4 146.8 152.3 162.1 602.5
General and Administrative 29.1 29.8 30.6 30.2 119.7 44.1 43.8 46.2 46.1 180.3 56.0 55.0 53.0 52.0 216.0
Operating Income ($1.9) $16.2 $16.1 $19.6 $50.0 $31.8 $57.1 $57.1 $82.3 $228.3 $93.5 $106.5 $109.1 $114.6 $423.7
Depreciation & Amortization 351.1 387.0 422.1 476.5 1,636.7 497.8 522.3 564.8 585.4 2,170.4 648.6 648.1 691.2 710.4 2,698.4
EBITDA 349.1 403.2 438.2 496.1 1,686.7 529.6 579.4 622.0 667.7 2,398.7 742.1 754.6 800.3 825.0 3,122.1
nterest and other income (0.1) (0.5) 0.8 0.3 0.5 1.0 (2.9) (0.2) (0.8) (3.0) (1.0) (1.0) (1.0) (1.0) (4.0)
nterest and other expense (5.0) (5.0) (5.0) (5.0) (20.0) (6.7) (7.5) (7.4) (7.4) (29.1) (10.4) (12.1) (12.1) (12.1) (46.7)
Loss on extinguishment of debt 0.0 (25.1) 0.0 0.0 0.0 (25.1) 0.0
Total non-operating income/(expense) (5.1) (5.5) (4.2) (4.7) (19.5) (30.9) (10.5) (7.6) (8.3) (57.3) (11.4) (13.1) (13.1) (13.1) (50.7)
Pretax ncome (7.0) 10.7 11.9 14.9 30.5 0.9 46.6 49.5 74.0 171.1 82.1 93.4 96.0 101.5 373.1
Provision for income taxes (2.4) 4.5 4.3 7.0 13.3 (1.8) 17.2 17.7 25.6 58.7 31.2 35.5 36.5 38.6 141.8
Net Income ($4.6) $6.2 $7.7 $7.9 $17.2 $2.7 $29.5 $31.8 $48.4 $112.4 $50.9 $57.9 $59.5 $62.9 $231.3
Basic Shares 55.5 55.5 55.5 55.6 55.5 56.0 58.2 59.1 59.5 58.2 60.0 60.5 61.0 61.5 60.7
Diluted Shares 55.5 58.8 58.7 59.1 58.0 60.1 60.6 61.0 61.3 60.8 61.8 62.3 62.8 63.3 62.5
Basic EPS (GAAP) ($0.08) $0.11 $0.14 $0.14 $0.31 $0.05 $0.51 $0.54 $0.81 $1.93 $0.85 $0.96 $0.98 $1.02 $3.81
DiIuted EPS (GAAP) ($0.08) $0.11 $0.13 $0.13 $0.30 $0.05 $0.49 $0.52 $0.79 $1.85 $0.82 $0.93 $0.95 $0.99 $3.70
Basic EPS ($0.08) $0.11 $0.14 $0.14 $0.31 $0.33 $0.51 $0.54 $0.81 $2.21 $0.85 $0.96 $0.98 $1.02 $3.81
DiIuted EPS ($0.08) $0.11 $0.13 $0.13 $0.29 $0.31 $0.49 $0.52 $0.79 $2.11 $0.82 $0.93 $0.95 $0.99 $3.70
Income Statement Ratios
Gross margin 28.3% 27.6% 26.8% 26.4% 27.2% 29.0% 29.5% 28.5% 30.9% 29.5% 31.5% 31.3% 31.2% 30.9% 31.2%
Technology and development 9.5% 9.2% 9.1% 8.7% 9.1% 9.0% 8.7% 8.6% 8.3% 8.7% 8.6% 8.3% 8.2% 7.9% 8.2%
Marketing 15.6% 13.3% 12.5% 12.4% 13.4% 12.6% 11.4% 10.5% 11.6% 11.5% 11.1% 11.0% 11.1% 11.4% 11.2%
G&A 3.3% 3.4% 3.4% 3.2% 3.3% 4.3% 4.1% 4.2% 3.9% 4.1% 4.4% 4.1% 3.9% 3.7% 4.0%
Operating margin -0.2% 1.8% 1.8% 2.1% 1.4% 3.1% 5.3% 5.2% 7.0% 5.2% 7.3% 8.0% 8.0% 8.0% 7.8%
Net margin -0.5% 0.7% 0.8% 0.8% 0.5% 0.3% 2.8% 2.9% 4.1% 2.6% 4.0% 4.3% 4.4% 4.4% 4.3%
Tax Rate 34.7% 42.1% 35.8% 47.0% 43.7% -189.1% 36.8% 35.7% 34.6% 34.3% 38.0% 38.0% 38.0% 38.0% 38.0%
Year-over-Year Changes
Total Revenues 21.0% 12.8% 10.1% 8.0% 12.6% 17.7% 20.3% 22.2% 24.3% 21.2% 24.3% 25.1% 23.5% 21.2% 23.5%
Gross Profit -12.3% -17.7% -15.0% -17.0% -15.6% 20.8% 28.5% 29.9% 45.7% 31.3% 34.9% 32.8% 35.4% 21.3% 30.7%
G&A 26.5% -2.8% 2.6% -12.3% 1.5% 51.7% 47.1% 51.2% 52.6% 50.6% 26.9% 25.4% 14.7% 12.7% 19.8%
Marketing 30.3% 24.5% 27.1% 2.7% 20.4% -4.9% 3.0% 2.5% 16.6% 4.0% 9.4% 20.6% 31.2% 18.4% 19.6%
Technology and development 62.7% 40.9% 18.8% 1.7% 27.0% 11.1% 14.2% 15.8% 19.5% 15.1% 19.6% 19.2% 17.2% 14.1% 17.5%
Operating ncome -101.9% -86.0% -83.3% -72.3% 87.0% NM 253.6% 254.0% 319.0% 356.8% 194.0% 86.5% 91.0% 39.3% 85.6%
Net ncome -107.6% -91.0% -87.7% -80.6% 92.6% -158.7% 378.1% 314.6% 513.2% 555.3% 1794.0% 96.5% 87.0% 30.0% 105.8%
Diluted EPS -107.4% -91.7% -88.7% -81.8% -93.1% -475.4% 362.7% 299.2% 491.4% 617.3% 165.7% 91.2% 81.7% 25.9% 75.1%
Diluted Shares Outstanding 2.2% 9.1% 9.0% 6.7% 6.7% 8.5% 3.0% 3.8% 3.7% 4.7% 2.7% 2.8% 2.9% 3.2% 2.9%
Sources: Company reports and Wedbush Securities estimates.







Michael Pachter (213) 688-4474
NetfIix | 4

Analyst Biography

Michael Pachter is the Managing Director of Equity Research, covering the Digital Media sector, and is also the Head of Research for
the Private Shares Group. He has been recognized as StarMine's Top Earnings Estimator for a number of years and Best on the Street
by the Wall Street Journal. Michael brings over 20 years of experience as a financial professional to both the Equity Research
Department and the Private Shares Group along with extensive knowledge across the social media sector in both public and private
companies.
Mr. Pachter holds an M.B.A. from the Anderson School at the University of California at Los Angeles, a Juris Doctor from Pepperdine
University, an LL.M. in Taxation from the University of Florida, and a bachelor's degree in Political Science from California State
University, Northridge.
Michaels' Edge: Michael has over 30 years of work experience, holding various financial and management positions in industry and
having been at Wedbush for 13 years. Michael is one of the most quoted and outspoken analysts in the Video Games Sector and is
often among the first called by journalists covering the sector. Michael's breadth of industry knowledge and contacts in the
entertainment industry provides him with exceptional insights into industry trends and ideas. Michael believes he is the "Why" and
What's Next source that investors turn to for insights into why events are happening in the sector and how they will progress.


Covered Companies Mentioned in this Report (priced as of cIose ApriI 11, 2014)

COMPANY TICKER RATING PRICE PRICE TARGET
AMAZON AMZN NEUTRAL $311.73 $330

AnaIyst Certification
, Michael Pachter, Nick McKay, Nick Citrin, certify that the views expressed in this report accurately reflect my personal opinion and that have
not and will not, directly or indirectly, receive compensation or other payments in connection with my specific recommendations or views
contained in this report.

Disclosure information regarding historical ratings and price targets is available at http://www.wedbush.com/ResearchDisclosure/DisclosureQ114.pdf

Investment Rating System:
Outperform: Expect the total return of the stock to outperform relative to the median total return of the analyst's (or the analyst's team) coverage
universe over the next 6-12 months.
Neutral: Expect the total return of the stock to perform in-line with the median total return of the analyst's (or the analyst's team) coverage
universe over the next 6-12 months.
Underperform: Expect the total return of the stock to underperform relative to the median total return of the analyst's (or the analyst's team)
coverage universe over the next 6-12 months.

The nvestment Ratings are based on the expected performance of a stock (based on anticipated total return to price target) relative to the
other stocks in the analyst's coverage universe (or the analyst's team coverage).*

Rating Distribution
(as of March 31, 2014)
Investment Banking ReIationships
(as of March 31, 2014)
Outperform:54%
Neutral: 43%
Underperform: 3%
Outperform:22%
Neutral: 2%
Underperform: 0%

The Distribution of Ratings is required by FNRA rules; however, WS' stock ratings of Outperform, Neutral, and Underperform most closely
conform to Buy, Hold, and Sell, respectively. Please note, however, the definitions are not the same as WS' stock ratings are on a relative
basis.

The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity. The
analysts receive compensation that is based upon various factors including WS' total revenues, a portion of which are generated by WS'
investment banking activities.

Wedbush Equity Research DiscIosures as of ApriI 13, 2014

Company Disclosure
Netflix 1
Amazon.com 1

Research DiscIosure Legend
1. WS makes a market in the securities of the subject company.
2. WS managed a public offering of securities within the last 12 months.
3. WS co-managed a public offering of securities within the last 12 months.




Michael Pachter (213) 688-4474
NetfIix | 5

4. WS has received compensation for investment banking services within the last 12 months.
5. WS provided investment banking services within the last 12 months.
6. WS is acting as financial advisor.
7. WS expects to receive compensation for investment banking services within the next 3 months.
8. WS provided non-investment banking securities-related services within the past 12 months.
9. WS has received compensation for products and services other than investment banking services within the past 12 months.
10. The research analyst, a member of the research analyst's household, any associate of the research analyst, or any individual
directly involved in the preparation of this report has a long position in the common stocks.
11. WS or one of its affiliates beneficially own 1% or more of the common equity securities.
12. The analyst maintains Contingent Value Rights that enables him/her to receive payments of cash upon the company's meeting
certain clinical and regulatory milestones.

Price Charts
Wedbush disclosure price charts are updated within the first fifteen days of each new calendar quarter per FNRA regulations. Price charts for
companies initiated upon in the current quarter, and rating and target price changes occurring in the current quarter, will not be displayed until
the following quarter. Additional information on recommended securities is available on request.




* WS changed its rating system from (Strong Buy/Buy/Hold/Sell) to (Outperform/ Neutral/Underperform) on July 14, 2009.
Please access the attached hyperlink for WS' Coverage Universe: http://www.wedbush.com/services/cmg/equities-division/research/equity-
research Applicable disclosure information is also available upon request by contacting Ellen Kang in the Research Department at (213) 688-
4529, by email to ellen.kang@wedbush.com, or the Business Conduct Department at (213) 688-8090. You may also submit a written request
to the following: Business Conduct Department, 1000 Wilshire Blvd., Los Angeles, CA 90017.


OTHER DISCLOSURES




Michael Pachter (213) 688-4474
NetfIix | 6

RESEARCH DEPT. * (213) 688-4505 * www.wedbush.com
EQUTY TRADNG Los Angeles (213) 688-4470 / (800) 421-0178 * EQUTY SALES Los Angeles (800) 444-8076
CORPORATE HEADQUARTERS (213) 688-8000
The information herein is based on sources that we consider reliable, but its accuracy is not guaranteed. The information contained herein is not a
representation by this corporation, nor is any recommendation made herein based on any privileged information. This information is not intended to be
nor should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any security mentioned
herein. This firm, Wedbush Securities, its officers, employees, and members of their families, or any one or more of them, and its discretionary and
advisory accounts, may have a position in any security discussed herein or in related securities and may make, from time to time, purchases or sales
thereof in the open market or otherwise. The information and expressions of opinion contained herein are subject to change without further notice. The
herein mentioned securities may be sold to or bought from customers on a principal basis by this firm. Additional information with respect to the
information contained herein may be obtained upon request.




























































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Morry Brown (213) 688-4311 Nick McKay (213) 688-4343
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RETAIL/CONSUMER MARKET RESEARCH Internet: Media and Gaming
Michael Pachter (213) 688-4474
Gabriella Santaniello (213) 688-4557 Nick McKay (213) 688-4343
Nick Citrin (213) 688-4495
INDUSTRIAL GROWTH TECHNOLOGY
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Ellen Kang (213) 688-4529
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