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Netflix revenue disappoints, shares dip

Netflix (NFLX) reported lighter-than-expected revenue for the fourth quarter of 2018.

The Los Gatos, California-based company posted revenue of $4.19 billion, falling short of estimates of $4.21 billion for the quarter. The company reported diluted earnings of 30 cents per share, ahead of the 24 cents expected by analysts.

The company also said it foresees fiscal first quarter revenue of $4.49 billion, lower than the expected $4.6 billion. Management expects the company will earn 56 cents per share in the first quarter, falling short of estimates of 85 cents, according to Bloomberg data.

Netflix said it added 8.8 million paid members in the fourth quarter, comprising 1.5 million domestic additions and 7.3 million domestic additions and bringing total global streaming paid memberships to 139.26 million at the end of the quarter. It foresees global streaming paid net additions of 8.9 million in the first quarter of 2019.

The company also reported free cash flow burn of negative $1.3 billion for the quarter, bringing total outflow to $3 billion for the year. Netflix executives expect cash burn to be similar in 2019 before improving.

Shares of Netflix declined 2.76% to $343.43 each as of 4:43 p.m. ET.

“The fact that investors reacted negatively to what amounted to a strong performance indicates the extent to which Netflix has set a high bar,” Paul Verna, eMarketer media analyst, wrote in an email. “Its paid subscriber guidance for Q1—arguably its most important metric—is somewhat higher than previously anticipated, which bodes well for the company as it prepares to face mounting competition from the likes of Disney, AT&T, and NBC Universal. The bottom line is that Netflix remains the uncontested leader in the subscription video space.”

Among other things investors might find interesting, Netflix estimates that 80 million households will see “Bird Box” in its first four weeks on the platform. Netflix in December said that more than 45 million accounts watched “Bird Box” in its first seven days, marking a record-breaking debut for the streaming service. The company added that “Elite,” a Spanish original film, was viewed by more than 20 million member households in its first four weeks.

Netflix also addressed its widely buzzed about choose your own adventure show format, introduced in the form of “Black Mirror: Bandersnatch.” While management did not provide specific numbers, they did indicate they plan to add more interactive viewer experiences going forward.

Ahead of the earnings announcement, analysts maintained a bullish tone on Netflix’s international prospects, with several firms commending the size of Netflix’s global addressable market. Analysts from Morgan Stanley list international subscriber growth as one of the “key value drivers” for the company. And Cowen analysts forecast 14% annual revenue growth for the next 10 years, driven by 10% domestic growth and 16% international growth for the company. Netflix has been upping its investment in international markets, and announced plans to double its investment in France by producing 14 local shows in late September.

Netflix’s disappointing fourth-quarter revenue announcement comes on the heels of the company’s recent move to raise prices for the fourth time in its 12-year history. The 13% to 18% price hike reported earlier this week marks the streamer’s largest, and is the first increase since October 2017. The streaming giant’s most popular plan increased to $13 per month from $11 previously. The basic plan jumped to $9 from $8 per month, and its most expensive plan rose to $16 from $14 per month. Netflix’s new pricing compares to HBO Now’s $14.99 price tag per month and Hulu’s ad-free $11.99 product.

The news of the price raise sent Netflix’s stock higher by 6.5% on Tuesday as investors considered the increase to revenue to compensate for some of the company’s spending on new content. Netflix planned to spend $8.4 billion on its programming over the next 12 months, as of the close of the third quarter.

The Netflix logo is shown in this illustration photograph in Encinitas, California October 14, 2014. REUTERS/Mike Blake/File Photo

“Netflix utilizes occasional price hikes to fund an unprecedented wave of original content growth,” Cowen analyst John Blackledge wrote in a note Wednesday. The firm estimates that Netflix’s 2019 revenue will hit $20.3 billion from $19.2 billion previously, slightly above the average estimate of $19.89 billion in full-year revenue anticipated among analysts polled by Bloomberg.

Analysts widely believed the price hikes will not meaningfully impact Netflix’s subscriber growth over the long-term as users stick with the platform for its original content.

“While any price increase, particularly one this significant, is likely to be met with increased churn, we believe the value Netflix offers subscribers and the strong content slate in the year ahead will largely offset that,” analysts from Goldman Sachs wrote in a note Tuesday.

Netflix’s glaring downside risk comes as multiple other media companies have announced plans to introduce or expand on-demand video services. Some of these competitors include WarnerMedia, which announced plans to release a streaming service in the fourth quarter of 2019, and Disney, which will pull its movies from Netflix when it launches its own Disney+ direct to consumer streaming service this year. Many analysts, however, remain bullish on the streaming service even as new entrants come into the space.

“We continue to believe competition, content and cost concerns are overblown and that the Street is too conservative regarding the growth outlook for Netflix,” analysts from Credit Suisse wrote in a note ahead of fourth-quarter results.

Shares of Netflix are up about 31% in 2019, and were up about 40% in 2018.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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