One of the top-performing stocks of the past decade has been streaming giant Netflix (NASDAQ: NFLX). Netflix stock is up 6,690 percent in the past decade. So far this year, the red-hot stock is showing no signs of slowing down.

Netflix has been spreading its empire across the world for years. But 2019 may finally be the year it starts opening up the cash flow spigot.

Netflix Stock: A Quintessential Growth Story

For as long as most NFLX investors can remember, the bull thesis for owning the stock was something along the lines of “growth at all costs.” While other companies were worried about cash flow and earnings, Netflix stock typically reacted most to quarterly subscriber growth numbers.

The most recent quarter was no exception. Netflix reported a slight revenue miss in the fourth quarter. However, it beat consensus estimates for both domestic and international subscriber additions, adding 7.31 million international users. EPS was down 27 percent from a year ago. Investors didn’t care.

The stock soared because NFLX added more than a million more international subscribers that Wall Street expected.

Content costs are expected to rise to a staggering $15 billion in 2019. Negative free cash flow ballooned to a mind-boggling $1.3 billion in the fourth quarter alone. Yet NFLX stock is up another 33 percent so far in 2019.

A Subtle Hint

One of the reasons Wall Street is so optimistic about the outlook for Netflix stock is because of a subtle bit of guidance the company issued in its earnings report. After hovering around 12 percent for the first three quarters of 2018, Netflix reported operating margins of only 5.2 percent in the fourth quarter.

This contraction was due to its heavy spending on content. However, looking ahead to 2019, management guided for first-quarter operating margins of 9 percent and full-year operating margins of 13 percent.

Bank of America analyst Nat Schindler recently pointed out why those projections are more bullish than they seem. Current consensus 2020 operating margin projections for Netflix are 16.4 percent.

However, for Netflix to start 2019 at 9 percent margins in the first quarter and end the full year with margins of 13 percent, Schindler said it will likely finish this year with operating margins approaching 17 percent.

“Management commentary on the sell-side callback suggested that continued sequential improvement in operating margins from 4Q19 into 2020 was reasonable and likely, making Street operating margin estimates of 16.4% for 2020 seem low,” Schindler wrote.

Why Netflix Margins Matter

The one knock on the bull thesis is that Netflix stock is already pricing in a tremendous amount of future profits. Netflix’s forward price-to-earnings ratio is in nosebleed territory at 55.9. For those keeping score at home, that’s the 11th highest forward earnings multiple in the S&P 500.

Netflix buyers clearly don’t care how much profit Netflix is making today, tomorrow or all of 2019 for that matter. The Netflix story has always been about how much cash it will eventually be able to milk from its subscribers years from now.

Netflix’s recent price hike is a perfect example  if the company’s potential and likely one of the main reasons why management is guiding for higher margins throughout the year.

In January, Netflix announced it was raising the monthly price of its most popular subscription from $11 to $13. The company also issued similar price hikes for other plans. The full impact of these price hikes won’t be reflected for at least another full quarter.

Pricing Power Is Key

The reason Netflix stock is so expensive relative to peers is that it’s easy to see how Netflix can continue to grow its international subscriber base while squeezing its already established subscriber base with higher prices.

Disney (NYSE: DIS), Amazon (NASDAQ: AMZN) and others are attempting to establish a presence in the streaming market. But up to this point, Netflix is dominating the space.

According to S&P Global Market Intelligence, the average U.S. monthly cable TV bill in 2018 was $107. The most popular Netflix plan now costs $13 per month.

Netflix subscribers may not like to hear it, but that price is headed much higher. The million dollar question for long-term Netflix investors is just how much subscribers are willing to pay. Given that $107 average cable bill, the answer is likely “a lot more than $13.”

Takeaway

Netflix’s plan is simple: add subscribers, raise prices, increase margins, let the profits flow in. To justify its current share price, Netflix will need to continue to execute that plan successfully for at least a couple more years.

However, if that recipe keeps working for three years or more, there’s nothing to suggest NFLX stock is headed anywhere but higher.

As of this writing, Wayne Duggan held no positions in the aforementioned securities.