How to analyze Netflix’s income statement

When it launched in 1997, Netflix Inc (NFLX) created a blueprint for the future of television. Netflix is ​​an Internet media streaming provider comparable to Amazon Prime Instant Video, Hulu, and YouTube, as well as a provider of DVD and Blu-ray discs through the US Postal Service. Netflix’s success is evident through its 130 million subscriptions and through its continued rise in earnings and soaring stock prices, both of which are reflected in Netflix’s income statement.

Importance of income

The income statement is one of the three most important financial statements produced in assessing the financial position of a company. The income statement determines a summative assumption of a company’s overall profitability by accounting for its achieved turnover and then cross-examining it against its corresponding expenses. Companies typically report both an 8-K and a 10-Q quarterly, with a 10-K being the filing of the annual report. The income statement begins with revenue and ends with a company’s earnings per share (EPS).

The main components

Income statement information usually attracts the most media attention when the company publishes its quarterly and annual results. Income statement reports will most often focus on a company’s revenue, net income, and earnings per share, which are typically projected by analysts in the company’s selling sector.

The income statement can be broken down into three parts: direct, indirect and capital. Turnover is the highest turnover of the enterprise during the reference period. This is the most direct aspect of the income statement and immediately provides an assessment of the company’s performance in the market. Here, we’ll take a look at the first three quarters income statement for Netflix. Their company’s revenue in the third quarter of 2018 was $ 11.61 billion. This amount increased from $ 8.41 billion for a total percentage increase of 38%. Netflix had direct revenue costs (cost of goods sold) of $ 6.898 billion, which left them with a gross margin for the nine months of $ 4.71 billion. This equates to a gross profit margin of 41%, which is slightly above their 12-month average (TTM) of 38%.

Then we turn to their indirect costs, which include marketing, technology and development, as well as general and administrative costs. These are costs that are spread over all of their income. In 2018, the company increased its indirect costs with the largest increase in marketing at 68%. Subtracting indirect costs from gross profit gives us operating profit, also known as profit before interest and taxes (EBIT). Netflix’s EBIT was $ 1.4 billion, an increase of 134% from 2017.

From there we move on to the capital part of the income statement. This section of the income statement can get quite tricky as companies can report both GAAP and non-GAAP profits, which may require some adjustments to arrive at non-GAAP EPS. In the October 2018 report, Netflix does not appear to have any adjustments. From EBIT, Netflix subtracts interest paid on debt for capital expenditures, interest earned on invested capital, and taxes. Below is a breakdown:

Image by Sabrina Jiang © Investopedia 2021


After including interest and taxes, Netflix reported net income of $ 1.077 billion, an increase of 189%. Using diluted shares outstanding of 451,283, this translates into earnings per share of $ 2.39. Growth in net income can often be a better indicator of business performance than EPS since EPS changes with management of the company’s stock, but both are generally used. In 2018, the diluted shares outstanding increased from 446,367 to 451,283.

Current analysis

Using the information from the first three quarters of 2018, we see that revenue increased 38%, net profit increased 189%, and EPS increased 185%. All of this shows that Netflix remains in a phase of strong growth. Looking at some more historical information, we see that revenue growth over the past three years has averaged 29%, net income growth has averaged 28%, and EPS growth has averaged 26%.

Two key measurement metrics that we can look at after analyzing the income statement are P / S and P / E. Netflix has a P / E TTM of 146, which is pretty high considering mid-value companies are typically around 15-20. At 146, investors are willing to pay $ 146 for every dollar of company profit. Netflix has a TTM P / S of 10.14 which is also quite high. At 10.14, investors are prepared to pay $ 10.14 per dollar of income per share that the company earns.

The graph below shows the P / S and P / E of the FAANG group:

Image by Sabrina Jiang © Investopedia 2021


For 2018 and 2019, Netflix looks likely to maintain strong growth. Taking a quick look at analysts’ projections for 2019, we see that revenue growth is projected to be between 25% and 31%. BPA growth is expected to be 50-100%. Based on the projections, it appears that revenue and earnings growth may continue to constitute the higher P / S and P / E valuations in the near term. Analysts believe the stock has a little more room for improvement with a one-year price target of $ 399.


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