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Netflix Inc. (NFLX)

Analysis of Investments

High level of difficulty

Investment Accounting Policy

Cash Equivalents and Short-term Investments

Netflix considers investments in instruments purchased with an original maturity of 90 days or less to be cash equivalents. Netflix also classifies amounts in transit from payment processors for customer credit card and debit card transactions as cash equivalents.

In July 2017, Netflix sold all short-term investments. Netflix classified short-term investments, which consisted of marketable securities with original maturities in excess of 90 days as available-for-sale. Short-term investments were reported at fair value with unrealized gains and losses included in “Accumulated other comprehensive loss” within Stockholders’ equity in the Consolidated Balance Sheets. The amortization of premiums and discounts on the investments, realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are included in “Interest and other income (expense)” in the Consolidated Statements of Operations. Netflix used the specific identification method to determine cost in calculating realized gains and losses upon the sale of short-term investments.

Short-term investments were reviewed periodically to identify possible other-than-temporary impairment. When evaluating the investments, Netflix reviewed factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, Netflix’s intent to sell, or whether it would be more likely than not that Netflix would be required to sell the investments before the recovery of their amortized cost basis.

Source: 10-K (filing date: 2019-01-29).

Adjustment to Net Income (Loss): Mark to Market Available-for-sale Securities

Netflix Inc., adjustment to Net Income

US$ in thousands

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12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net income (as reported) 1,211,242  558,929  186,678  122,641  266,799 
Add: Change in unrealized gains (losses) on available-for-sale securities, net of tax —  599  207  (975) (253)
Net income (adjusted) 1,211,242  559,528  186,885  121,666  266,546 

Based on: 10-K (filing date: 2019-01-29), 10-K (filing date: 2018-01-29), 10-K (filing date: 2017-01-27), 10-K (filing date: 2016-01-28), 10-K (filing date: 2015-01-29).

Adjusted Ratios: Mark to Market Available-for-sale Securities (Summary)

Netflix Inc., adjusted ratios

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net Profit Margin
Reported net profit margin 7.67% 4.78% 2.11% 1.81% 4.85%
Adjusted net profit margin 7.67% 4.79% 2.12% 1.79% 4.84%
Return on Equity (ROE)
Reported ROE 23.12% 15.60% 6.97% 5.52% 14.36%
Adjusted ROE 23.12% 15.62% 6.97% 5.47% 14.35%
Return on Assets (ROA)
Reported ROA 4.66% 2.94% 1.37% 1.20% 3.78%
Adjusted ROA 4.66% 2.94% 1.38% 1.19% 3.78%

Based on: 10-K (filing date: 2019-01-29), 10-K (filing date: 2018-01-29), 10-K (filing date: 2017-01-27), 10-K (filing date: 2016-01-28), 10-K (filing date: 2015-01-29).

Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Netflix Inc.’s adjusted net profit margin improved from 2016 to 2017 and from 2017 to 2018.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by shareholders’ equity. Netflix Inc.’s adjusted ROE improved from 2016 to 2017 and from 2017 to 2018.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by total assets. Netflix Inc.’s adjusted ROA improved from 2016 to 2017 and from 2017 to 2018.

Netflix Inc., Ratios: Reported vs. Adjusted

Adjusted Net Profit Margin

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net income 1,211,242  558,929  186,678  122,641  266,799 
Revenues 15,794,341  11,692,713  8,830,669  6,779,511  5,504,656 
Ratio
Net profit margin1 7.67% 4.78% 2.11% 1.81% 4.85%
Adjusted: Mark to Market Available-for-sale Securities
Selected Financial Data (US$ in thousands)
Adjusted net income 1,211,242  559,528  186,885  121,666  266,546 
Revenues 15,794,341  11,692,713  8,830,669  6,779,511  5,504,656 
Ratio
Adjusted net profit margin2 7.67% 4.79% 2.12% 1.79% 4.84%

Based on: 10-K (filing date: 2019-01-29), 10-K (filing date: 2018-01-29), 10-K (filing date: 2017-01-27), 10-K (filing date: 2016-01-28), 10-K (filing date: 2015-01-29).

2018 Calculations

1 Net profit margin = 100 × Net income ÷ Revenues
= 100 × 1,211,242 ÷ 15,794,341 = 7.67%

2 Adjusted net profit margin = 100 × Adjusted net income ÷ Revenues
= 100 × 1,211,242 ÷ 15,794,341 = 7.67%

Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Netflix Inc.’s adjusted net profit margin improved from 2016 to 2017 and from 2017 to 2018.

Adjusted Return on Equity (ROE)

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net income 1,211,242  558,929  186,678  122,641  266,799 
Stockholders’ equity 5,238,765  3,581,956  2,679,800  2,223,426  1,857,708 
Ratio
ROE1 23.12% 15.60% 6.97% 5.52% 14.36%
Adjusted: Mark to Market Available-for-sale Securities
Selected Financial Data (US$ in thousands)
Adjusted net income 1,211,242  559,528  186,885  121,666  266,546 
Stockholders’ equity 5,238,765  3,581,956  2,679,800  2,223,426  1,857,708 
Ratio
Adjusted ROE2 23.12% 15.62% 6.97% 5.47% 14.35%

Based on: 10-K (filing date: 2019-01-29), 10-K (filing date: 2018-01-29), 10-K (filing date: 2017-01-27), 10-K (filing date: 2016-01-28), 10-K (filing date: 2015-01-29).

2018 Calculations

1 ROE = 100 × Net income ÷ Stockholders’ equity
= 100 × 1,211,242 ÷ 5,238,765 = 23.12%

2 Adjusted ROE = 100 × Adjusted net income ÷ Stockholders’ equity
= 100 × 1,211,242 ÷ 5,238,765 = 23.12%

Ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by shareholders’ equity. Netflix Inc.’s adjusted ROE improved from 2016 to 2017 and from 2017 to 2018.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net income 1,211,242  558,929  186,678  122,641  266,799 
Total assets 25,974,400  19,012,742  13,586,610  10,202,871  7,056,651 
Ratio
ROA1 4.66% 2.94% 1.37% 1.20% 3.78%
Adjusted: Mark to Market Available-for-sale Securities
Selected Financial Data (US$ in thousands)
Adjusted net income 1,211,242  559,528  186,885  121,666  266,546 
Total assets 25,974,400  19,012,742  13,586,610  10,202,871  7,056,651 
Ratio
Adjusted ROA2 4.66% 2.94% 1.38% 1.19% 3.78%

Based on: 10-K (filing date: 2019-01-29), 10-K (filing date: 2018-01-29), 10-K (filing date: 2017-01-27), 10-K (filing date: 2016-01-28), 10-K (filing date: 2015-01-29).

2018 Calculations

1 ROA = 100 × Net income ÷ Total assets
= 100 × 1,211,242 ÷ 25,974,400 = 4.66%

2 Adjusted ROA = 100 × Adjusted net income ÷ Total assets
= 100 × 1,211,242 ÷ 25,974,400 = 4.66%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by total assets. Netflix Inc.’s adjusted ROA improved from 2016 to 2017 and from 2017 to 2018.