Did Netflix Just Signal the End of the Bear Market?

Wall Street stayed in a good mood on Tuesday, building on Monday's gains with further advances. The size of the move higher wasn't quite as big as yesterday, but the Dow Jones Industrial Average (^DJI -0.11%), Nasdaq Composite (^IXIC 0.10%), and S&P 500 (^GSPC 0.02%) were all up in the neighborhood of 1% on the day.

Data source: Yahoo! Finance.

Many stocks performed well during the regular trading session, but many investors had their eyes focused squarely on what would happen after hours when Netflix (NFLX -3.92%) released its third-quarter financial report. After having struggled through a sluggish period following its boom during the early years of the COVID-19 pandemic, Netflix gave some evidence that it's finally bouncing back -- and some investors think that it might be the first sign of a potential end to the long bear market that has plagued Wall Street since before 2022 began.

Why Netflix shares soared

Shares of Netflix rocketed higher in after-hours trading, rising more than 14%. The streaming video company's results were certainly far from perfect, but they came in better than many had feared,  and showed Netflix moving in the right direction.

The key metric that most people paid the closest attention to was Netflix's total number of paid memberships globally. That figure rose by 2.41 million over the past three months to 223.09 million worldwide, and the gain was more than double the number of quarterly additions that Netflix had previously projected.

Other key measures of financial performance were mixed. Revenue slipped sequentially to $7.93 billion, with year-over-year growth slowing to just 5.9%. Net income was down 3.5% to $1.40 billion, resulting in earnings of $3.19 per share. However, free cash flow (FCF) bounced back from recent weakness, reversing outflows of $106 million in the year-ago period with positive FCF of $472 million.

Netflix blamed the reduction in revenue between the second and third quarters entirely on foreign exchange effects. On a currency-neutral basis, Netflix saw continued strong growth in its international segments, including 19% sales gains in the Asia-Pacific region and in Latin America, as well as 13% in Europe, the Middle East, and Africa.

Indeed, some of those headwinds are likely to plague Netflix going forward as well. The company projected fourth-quarter revenue to fall further to $7.8 billion, again because of the strength of the U.S. dollar. It cited its new ad-supported tier in helping to drive 4.5 million new subscriptions in the fourth quarter.

Will ads work?

Netflix spent considerable time talking about its new ad-supported plans, which will take effect not just in the U.S. but in nearly a dozen markets internationally as well. Viewers can expect five minutes of advertising per hour of content, with prices 20% to 40% below the current entry-level price of basic plans.

Netflix reported that advertisers are excited about the opportunity to tap into its large customer base. Given that the 12 markets where Netflix is rolling out its ad-supported tier constitute about 75% of the global market with $140 billion in brand advertising, getting hold of Netflix inventory will be a lucrative proposition for advertisers.

On the other hand, the move comes at a time when many investors are nervous about the prospects for businesses that rely on advertising revenue. With the economy on precarious footing, some fear that a slowdown or full-blown recession could result in advertisers pulling back on their marketing spending. That won't necessarily stop Netflix's growth, but it could weigh on short-term results.

More broadly, though, signs that consumer-facing businesses are holding up well could be extremely important in bolstering investor confidence. In the end, it'll be positive signs like this that pull stocks out of their current bear market once an inevitable recovery starts to generate cyclical business momentum across the economy.