Academic journal article Journal of the International Academy for Case Studies

The Rise and Fall of Netflix: What Happened and Where Will It Go from Here?

Academic journal article Journal of the International Academy for Case Studies

The Rise and Fall of Netflix: What Happened and Where Will It Go from Here?

Article excerpt

CASE DESCRIPTION

The primary subject matter of this case concerns company analysis. Secondary issues include financial statement analysis, corporate strategy and international expansion. The case has a difficulty level of three and should be appropriate for undergraduate and graduate courses in investments and financial and strategic management. The case is designed to be taught in one to two class hours, with three hours of outside preparation by students.

CASE SYNOPSIS

Netflix is an innovative company that has changed the way we rent movies and watch TV shows. Its business model is based on a subscription service that provides home-delivery of DVD rentals and streaming of movies and TV shows. The company took advantage of the rapid growth in the DVD rental market, the internet and e-commerce by providing a service that the traditional brick-and-mortar retailers, such as Blockbuster, could not compete with. In 2011, however, a price hike, poor management decisions, changes in technology, and increased competition threatened Netflix, leading to a sharp decline in its share price. In this case, students analyze the fundamentals of Netflix including its financials and management decisions to help determine if Netflix's poor stock performance in 2011 was predictable as well as what the future might hold for this company.

INTRODUCTION

Rushing into the offices of Horizon Capital Invest (Note that Horizon Capital Invest, Brighton Portfolio, and the characters are fictitious), Chris Thompson almost knocked into the CEO, Ms. Steinberg. "Whew" said Chris under his breath after apologizing to the CEO. It was the last week of April 2012 and Chris had one week left in a four month internship for this prestigious money management firm. He had spent his internship learning how to research companies for two senior analysts to whom he reported. It had been a steep learning curve for Chris, a finance major in his senior year at an East Coast university. He had been lucky to land the internship and was determined to impress the analysts at Horizon Capital Invest, a place he dreamed of working after graduation. He certainly didn't want to be late for the morning briefing. With his iPad in one hand and his coffee in the other, he glanced at the clock as he entered the conference room. Chris had 30 seconds to spare and thought to himself, "another close call. Maybe this will be my lucky day and I finally get to show what I can do." Chris greeted both analysts as he took a seat at the long table, "Good morning Ms. Hunter", "Good morning Mr. Richardson". After some pleasantries they got right to work. Ms. Hunter told Chris that they were considering purchasing Netflix for the Brighton Portfolio. Abruptly, Mr. Richardson broke in and said "I don't feel this is a good investment. The stock has plummeted over the past ten months and I would not consider it a value play." Before Chris could even begin taking notes Ms. Hunter said pretty forcefully "Come on Joe, this is a great company. Management may have made some mistakes recently but this leads to a great buying opportunity. I feel certain we will have a double digit return from this one." Mr. Richardson, a very head strong individual, wasn't about to let Ms. Hunter have the last say. He quickly responded "Maria, you're really off base with Netflix. It would be against our fiduciary responsibility to add it to the portfolio." You could see that Ms. Hunter was not going to take this lightly. Her face was red and she raised her voice a couple of levels and said "Joe, you have to trust me on this one. I know management will get its act together and we'll see a reversal in the stock price within the next quarter" Chris had been frantically taking notes but was beginning to get a bit nervous sitting between the two arguing analysts. Then they dropped the bomb shell. Mr. Richardson said "alright Maria, let's get Chris to pull together a report covering Netflix's background and the factors affecting the company this past year that could help us make a decision. …

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