Read the article Time to Change your Investment Model by Feng Gu and Baruch Lev in the Financial Analysts Journal published by the CFA Institute available at the following link:

https://www.cfapubs.org/doi/pdf/10.2469/faj.v73.n4.4

1. Why do the authors consider earnings-based investment models to be flawed? (3 marks)

2. What do the authors propose as an alternative investment model? (3 marks)

3. Apply the authors method to Netflix. The most recent annual report is available here:

https://s22.q4cdn.com/959853165/files/doc_financials/annual_reports/0001065280-18-000069.pdf

Assume Netflix has a churn rate of 10% per year. Attach a spreadsheet showing your calculations.

Using all of Netflix global streaming memberships compare the total customer value in 2015, 2016 and 2017, and the customer value per share in each year as well (you will have to find Netflix share price at the end of each of those years. Note: we can modify the calculation slightly since Netflix provides a breakdown of contribution profit. Here customer value = customer duration x contribution profit. Use the diluted number of shares outstanding.) (5 marks)

Compare the customer value per share with the EPS number provided by Netflix. How do the growth rates of each compare? Which do you think more accurately reflects the increase in Netflix share price from 2015-2017? (3 marks)

Now calculate total customer value and customer value per share separately for the domestic streaming service and the international streaming service. (2 marks)

Given the numbers from part c), along with the number of domestic versus international customers in each year, and the significant differences in customer contribution between the two segments, what conclusions do you draw about Netflix business strategy? Why is the customer contribution so much lower in the international segment? (4 marks)