Why Baidu Is Soaring Today

Shares of Chinese tech giant Baidu (NASDAQ: BIDU) were soaring on Friday, up 13.1% as of 12:00 p.m. EDT, with "China's Google" reaching its highest stock price since mid-2023.

The catalyst for today's move was Baidu's confidential filing for an initial public offering of its in-house semiconductor chip design firm, Kunlunxin.

The move is thought to unlock value for the tech conglomerate, which may be undervalued based on a sum-of-the-parts calculation.

Is Baidu's chipmaking arm undervalued?

Baidu submitted a filing on New Year's Day to the Hong Kong Stock Exchange, later confirming that it intends to list Kunlunxin's shares on the Main Board of the exchange. Of note, Baidu is estimated to own about 59% of its chipmaking subsidiary, and intends to keep the company as an owned subsidiary even after listing Kunlunxin's shares.

Reuters reported that Baidu's most recent financing round for Kunlunxin was at a valuation of around 21 billion yuan, which equates to roughly $3 billion. So, if Baidu investors had neglected Baidu's chipmaking subsidiary as just a part of its internal business, the filing might have made investors realize more value was hiding underneath Baidu's corporate umbrella, which spans the company's core search, self-driving, cloud and other AI-related business lines.

Image source: Getty Images.

But it's strange Baidu was up this much on the news

It's a bit strange that Baidu's stock price rose so significantly today based on that news. After all, Baidu's market cap increased by about $6 billion today. So, assuming that investors hadn't factored in the valuation of Kunlunxin as a stand-alone subsidiary, one would expect Baidu to rise by only half that amount.

Still, the semiconductor sector was rallying hard today, even outside of the Reuters story about Kunlunxin. Enthusiasm over AI, next week's Consumer Electronics Show (CES), and other bullish analyst notes could all be factors.

Baidu actually saw revenue and profit declines in its recent earnings report, but has recently sought to disclose more about its smaller but fast-growing AI businesses. It appears the IPO of Kunlunxin is part of that effort.

Yet while AI growth is good to see, weakness in the core digital advertising space is a bit worrisome. Baidu's new AI ventures will take lots of investment, so a declining core business is search advertising puts these new units on the clock to deliver profits at scale.

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu. The Motley Fool has a disclosure policy.