COMM1180 Value Creation T2 2024 LRVE Mock Exam Question 2R

Java Python COMM1180 Value Creation

Final Exam Mock LRVE Question

T2 2024

LRVE Mock Exam Question 2

Netflix loses almost a million subscribers

After enjoying along reign as the king of streaming, Netflix faces a tough fight to keep its crown. It lost almost a million subscribers between April and July as more people decided to quit the service.

The streaming giant has now lost members for two quarters in a row, but the drop was smaller than it feared.

Asked what slowed the exodus, the firm's boss Reed Hastings, said: "If there was a single thing, we might say 'Stranger Things'."

The new season of the hit drama has been a phenomenal success, and may have helped stem the exodus of Netflix customers.

The company reported its first subscriber loss since 2011 in April, news that was followed by hundreds of job cuts and a sharp drop in its share price.

Rivals are challenging its dominance, while price hikes have taken atoll.

The subscriber losses reported on Tuesday were the biggest in the firm's history, with the US and Canada seeing the highest number of cancellations in the past three months, followed by Europe.

Guy Bisson, executive director atAmpere Analysis, said it was "inevitable" that Netflix would start to see its grip on the market loosen.

"When you're the leader, there's  only one direction to go, especially when a large amount of competition launches, which is what Netflix has seen in the last couple of years," he said.

It is a stark change for Netflix, which enjoyed years of seemingly unstoppable growth, as it revolutionised the way people around the world consumed entertainment.

Its position as a global giant was cemented when the pandemic hit in 2020 and people, stuck at home with few other options for entertainment, flocked to monster hits like Squid Game and The Crown.

But as pre-pan COMM1180 Value Creation T2 2024 LRVE Mock Exam Question 2R demic habits return, Netflix has struggled to attract new sign-ups - and maintain the loyalty of existing members, especially as the rising cost of living leads to people cutting back.

The company also faces fierce competition from the likes of Apple TV, HBO Max, Amazon Prime and Disney+. Netflix was once the disruptor, making video rental stores like Blockbuster redundant. But the disruptor is fast becoming the disrupted.

Netflix's move to make its service more expensive has also put off some customers.

https://www.bbc.com/news/business-62226912

Required:

Using the finance and valuation concepts from the course, explain how a 0.5% decline in subscribers can reasonably cause a 30% drop in the share price. You are not required to type out any formulas. You should reference the concepts that you think apply and use them to draw a connection between the news about subscribers and the share price of Netflix.

Guidance to Q2

•    Share valuation is not about the impacts on the current period

•    Equity is valued as a function of future cash flows

•    Identify  that  market  participants  have fundamentally  re-assessed the growth  prospects of Netflix for all future periods

•    Previously, investors assumed there would be more growth from Netflix for many years into the future. Now they are concerned about stabilisation or even decline, which started in the most recent quarter as discussed in the case study

•    Provide linkage to valuation theory/formulas: equity valued as a growing perpetuity/through Gordon’s Growth Model. If the growth rate goes from substantially positive to zero or negative (even while holding the discount rate constant), the share price will fall substantially

•    Also, discussion on why investors would  likely increase the discount rate because of higher perceived risk to the business