Image source: Sohu.com.

Shares of Sohu.com (NASDAQ:SOHU) soared 14.9% last week, moving higher after its CEO expressed a desire to spin off its search engine as a stand-alone company later this year. Wang Xiaochuan said in a Bloomberg interview that the plan is to take Sogou -- the search engine that's majority-owned by Sohu but with Tencent (NASDAQOTH:TCEHY) (NASDAQOTH:TCTZF), also an investor -- public in 2017.

Sogou isn't in talks with investment bankers just yet, though this is the kind of CEO admission that will probably line them up outside of Sohu's offices. The plan is to offer roughly 10% of the company in an IPO, and Xiaochuan feels that China's third-largest search engine will be valued at $4 billion to $5 billion. That's a pretty ambitious valuation, especially since Sohu itself commands a market cap of just $1.5 billion. Back out Sohu's $1.36 billion in cash and short-term investments and the proposed Sogou valuation becomes even more tantalizing if it comes anywhere close to Xiaochuan's target -- even with Tencent's interest in the venture. 

Baidu (NASDAQ:BIDU) is China's top dog, commanding a market cap north of $60 billion. Sogou is currently in third place, but it's a distant third place. Baidu's dominance is substantial, gnawing away at roughly 85% of the desktop search market and 78% of the mobile market. However, Xiaochuan feels that Baidu is within reach, and he wasn't afraid to take a shot at China's market darling.

"Over the past year, we've seen a trend where people are finding themselves not trusting Baidu as much and some are even seeking a replacement," he tells Bloomberg.

Xiaochuan's comments refer to last year's health scandal, where someone died after seeking cancer treatment through an iffy center he found through Baidu. Regulators slapped restrictions on the way medical ads are represented on Chinese search sites after the incident. 

Light at the end of the dark tunnel

Sohu investors can use something to be optimistic about. The stock plummeted 41% last year, so kicking off 2017 as one of the market's biggest winners during the first week of trading comes as a welcome relief. 

Things haven't gone according to plan. Revenue had declined for four consecutive quarters, culminating in a 21% year-over-year top-line drop in its latest quarter. Display advertising and online gaming have been trouble spots for Sohu, but now even Sogou is showing some growing pains in light of the Baidu-triggered regulatory changes for health-related ads. Revenue grew just 2% at Sogou in Sohu's latest quarter, declining 6% sequentially. 

The meandering performance at Sogou is still better than the double-digit declines in display advertising and online gaming. Now accounting for 37% of Sohu's revenue, Sogou is also now its largest business, something that Sohu and Tencent investors should be happy about. 

Investors have bailed on Sohu given the revenue declines and consistent quarterly deficits. The Sogou IPO can change that, especially if it approaches Xiaochuan's lofty market valuations. If a single piece of Sohu is worth far more than all of Sohu, it won't be long before the stock climbs back into favor.  

 

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends Sohu.com. The Motley Fool has a disclosure policy.