Please ensure Javascript is enabled for purposes of website accessibility

Why Stock Popped 21% Today

By Rich Smith - Apr 17, 2020 at 3:48PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It's official now: Changyou is back where it belongs.

What happened

A decade ago, Chinese internet company (SOHU 0.82%) spun off its video gaming arm in an IPO of the latter. Last year, with Sohu struggling to report a profit, the company reversed course and proposed to reabsorb its subsidiary (although it will be technically a "private" company).

Today, that merger became official -- and Sohu stock is up 21.2% as of 3 p.m. EDT.

Wall painting depicts a large yellow fish eating a smaller yellow fish

Image source: Getty Images.

So what

Why such a big jump? In an upgrade announced yesterday, investment banker Citigroup explained the significance of Sohu's move: "Changyou will become a private company wholly owned directly and indirectly by Sohu," said in a recap of Citi's note upgrading Sohu shares. This arrangement will benefit both companies, and in Sohu's case, the benefit could be significant, inasmuch as it will no longer have to "deduct the non-controlling interest stake" in Changyou from its earnings.

Citi predicts this move will improve Sohu's own reported profits, making Sohu stock look less expensive as a consequence.

Now what

At a market cap of only $308 million, historically free-cash-flow-positive Sohu stock hardly looks expensive as things stand already. Although I'd prefer to see how the financials end up looking after this deal is effective before rendering a final verdict, at first glance, the incorporation of Changyou and its even more robust free cash flow into Sohu's business looks like a plus for shareholders in the latter.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned Inc. Stock Quote Inc.
$17.89 (0.82%) $0.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.