Michael Burry, the investor who became famous for predicting the 2008 financial crisis in "The Big Short," just took aim at Baidu Inc. (BIDU) over what he sees as creative accounting that masks the company's real financial picture.

When Yesterday's Long-Lived Assets Become Today's Obsolete Equipment

Here's the story that caught Burry's attention: In 2024, Baidu's net income jumped more than 50%. Sounds impressive, right? Except that growth didn't come from selling more ads or signing up new AI customers. Instead, it came from a decision to extend the estimated "useful life" of the company's servers from five years to six years.

That accounting adjustment lowered depreciation expenses and boosted profits on paper. It essentially told investors: "Don't worry, our infrastructure will last longer than we thought."

Fast forward to this week's third-quarter 2025 earnings report. Baidu announced a RMB 16.2 billion ($2.2 billion) impairment charge, admitting that much of its existing infrastructure is now obsolete. That's over 50% of the company's total property, plant, and equipment value, written off in one quarter.

"Took a RMB 16.2 billion impairment on RMB 30.1B net PPE (over 50%)," Burry pointed out, highlighting the contradiction. You can't claim your servers will last an extra year and then, less than twelve months later, declare that half your equipment is worthless.

Management's Defense: It's All About AI

During the earnings call, Baidu's leadership framed the massive write-down as a strategic move for their AI transformation. CFO Haijian He explained the company's position clearly enough.

"We are accelerating investments in the latest AI computing technologies without any hesitation," He said. "Some of the existing assets no longer meet today's computing efficiency requirements. So we actually proactively did some impairments."

CEO Robin Li emphasized that "AI is driving transformative value," pitching the story as one of bold innovation rather than accounting missteps.

The problem is that the underlying business numbers tell a less exciting story. Total revenue fell 7% year-over-year to $4.38 billion in the third quarter. Free cash flow turned negative as AI spending increased. While management celebrates their "AI-native" transformation, Burry's analysis suggests investors should question whether Baidu's earnings history reflects operational success or just shifting accounting assumptions.

Stock Performance Tells Another Story

Despite Burry's criticism and the concerning fundamentals, Baidu shares have actually performed remarkably well in 2025. The stock is up 41.64% year-to-date, crushing both the Nasdaq Composite's 16.35% return and the Nasdaq 100's 16.82% gain.

On Tuesday, shares closed 2.66% higher at $117.14 before dropping 2.64% in after-hours trading. Over the past year, the stock has climbed 36.18%.

According to market data, BIDU shows a weaker price trend over the short term but maintains strong momentum in the medium and long terms, along with a strong value ranking.

The disconnect between Burry's accounting concerns and the stock's performance raises an interesting question: Are investors buying the AI transformation story, or are they overlooking red flags in the financial statements? When a company extends asset lives to smooth earnings one year and then writes off half those assets the next, it's worth asking what other surprises might be lurking in future quarters.

For now, the market seems willing to give Baidu the benefit of the doubt on its AI pivot. But Burry's track record of spotting financial irregularities before they become obvious to everyone else is exactly why people pay attention when he speaks up.