Netflix Free Cash Flow Calculation Correction

Includes: GME, NFLX
by: Adib Motiwala

I recently posted an article in which I compared Netflix (NASDAQ:NFLX) and Gamestop (NYSE:GME) and presented some financial numbers. I received an email from a reader that my calculation for free cash flow for Netflix was incorrect and that I should subtract the cost of purchasing their library.

In my original calculation, I used numbers from Yahoo Finance to calculate free cash flow for Netflix. I computed Free Cash Flow as Cash from Operations - Capex.

FCF = 325 - 46 = $279 million (FY2009)

However, when I looked at the 10k on the company website , I see the line items broken down in the cash flows from investing activities. Apart from the "Purchases of property and equipment" at $46 million, I also see "Acquisitions of content library" and "Proceeds from sale of DVDs" This content library cost was $193 million for the year 2009 and the sale of DVDs was $11 million.

In the case of Netflix, Capex should really include these costs. In manufacturing firms, we are used to seeing the Capex include expenditure on Plant, Property and Equipment. In the case of Netflix, the equipment can be equated with their content library. So, If i take this into account the Free Cash Flow for Netflix for 2009 will be

FCF = 325 - 46 - 193 + 11 = $97 million. (corrected)

Using the above FCF, Netflix Price / FCF = 63.8.

I then looked at the 10k for Gamestop and I found the 'Purchase of property and equipment' as $164 million, acquisitions at $8 million and Other at $15million. So, the FCF for Gamestop does not change. FCF = 644 - 164 = $480 million. and Price / FCF = 6.

This example proves the benefits of looking up the financial statements from the 10K and 10Q versus relying on 3rd party websites. In most cases, you will not find major differences. However, as this example shows there are times when the numbers will change a lot. In my example, Netflix's FCF multiple changed from 22 to 64!!

There are so many other benefits of just reading the SEC filings. You learn about the business much better by reading what the management is telling you in the Management Discussion and Analysis (MDA) section, the risks associated with the business, footnotes to the financial statements.

Disclosure: I am long Gamestop via shares and call options at the time of publishing this post. I do not have a position in Netflix currently. My positions may change at any time without any further updates. Please conduct your own research before considering investments based on these or any ideas on this blog. This post is to be considered as my research and not advice or a recommendation to buy or sell any of the stocks discussed.

Disclosure: Long GME