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2019 Could Be a Make-or-Break Year for Netflix

Netflix (NASDAQ: NFLX) continued its extraordinary growth in 2018, expanding its global paid subscriber base by 26% and driving a 35% surge in revenue over the course of the year.

Despite this rapid growth, the stock has endured severe volatility in recent months. Just in the past week, Netflix shares jumped on the news that the streaming video pioneer is raising prices again in the U.S., but then fell after the company's fourth-quarter earnings report on Thursday didn't quite meet investors' lofty expectations.

However, investors could get a much better sense of how much Netflix is worth by the time 2019 is over. If Netflix can continue growing its domestic subscriber base this year despite increased competition and its ambitious price jump, the stock could have plenty of room to keep rising.

Solid results in the fourth quarter

Netflix met or exceeded most aspects of its guidance during Q4. It grew its paid subscriber base by 8.84 million, compared to a forecast of 7.6 million. Nearly all of the upside relative to Netflix's outlook came in international markets.

Operating income fell to $216 million from $245 million a year earlier, but this beat Netflix's forecast by 5%. The year-over-year decline was due to the timing of content and marketing spending. Netflix burned $1.3 billion of cash last quarter, bringing its full-year cash burn to $3 billion, which was at the favorable end of its initial guidance range for 2018.

Heavy content spending is causing Netflix to burn cash. Image source: Netflix.

Netflix's Q1 guidance wasn't quite as impressive. Revenue is expected to reach $4.49 billion, up 21.4% year over year but below the average analyst estimate of $4.61 billion. Furthermore, the company's earnings-per-share forecast of $0.56 is far below the analyst consensus of $0.83. But on a more positive note, Netflix expects to add 8.9 million paying subscribers this quarter, up from 8.26 million in the first quarter of 2018.

Netflix is raising prices

Two days before the earnings report, Netflix announced a price hike for U.S. customers. The cost of its popular mid-tier plan will increase from $10.99 per month to $12.99 per month. The price of the premium plan -- which supports 4K streaming and up to four simultaneous streams -- will also increase by $2, reaching $15.99 per month. Finally, the basic standard-definition plan will cost $8.99 per month, up from $7.99 per month previously.

The price changes were implemented immediately for new subscribers, and will roll out to existing customers over the next few months.

While Netflix has increased its prices before, this was the first time that it has boosted the price of its most popular plan by $2 per month. It's also the first time that the company has raised the price of its basic plan, which targets price-sensitive customers. Finally, the increase comes just a little more than a year after Netflix last raised prices in its home market. In the past, it has waited longer between price increases.

If the price hike succeeds, Netflix is off to the races

Most analysts expect Netflix to experience very little pushback from customers over this price increase. As my colleague Adam Levy noted the last time the company boosted its prices in the U.S. (back in October 2017), Netflix is still a very good value compared to competing services -- and far cheaper than a cable TV subscription.

If Netflix customers have become so loyal that they will almost universally accept what amounts to a 13% to 18% price increase, it's hard to see what could derail Netflix in the years ahead. Subscriber growth may be slowing in the U.S., but the company could theoretically maintain a double-digit revenue growth rate for many years based on price increases alone.

On the flip side, if the price hike causes domestic subscriber growth to slow dramatically -- or even stop -- Netflix will have to think hard before attempting any further price increases. It would then have to rely on international growth to push free cash flow into positive territory. In that scenario, Netflix would probably struggle to live up to its roughly $150 billion market cap.

By the end of 2019, it should be obvious whether there was any customer resistance to Netflix's latest price increase. That in turn will provide a very good reading on whether Netflix stock can continue to soar or is doomed to fall back to earth.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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