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Aramco Hits $2 Trillion. What’s Next?

This article is more than 4 years old.

The stock price for Saudi Aramco touched $2 trillion two days after its listing on the Saudi stock exchange, Tadawul. Now Saudi prince Mohammed can claim a political victory before the people of the kingdom, asserting that the market has shown his assertion of a $2 trillion valuation to be true almost four years after he first spoke of it. Of course, his initial claim in 2016 was based on the sale of 5% of the company to global investors, not the less than 2% listed for sale this week to Saudi investors who were pressured, incentivized and, in some cases, duped into participating.

The question is whether Aramco is really worth $2 trillion under the current circumstances. For international investors, it is no longer an issue of what Aramco would be worth on its own. Rather, it has become a question of what Aramco is worth given the high levels of government interference in its operations and the market for Aramco equities. At this point, does anyone outside of Saudi Arabia think that the movement of Aramco share price is organic or natural? Or does everyone pretty much assume that it is based off of intense government interference?

Here is the evidence, investors will examine:

  • There have been previous reports of government interference with other Tadawul stocks, using the Saudi sovereign wealth fund to prop up prices upon bad news.
  • The Saudi government reportedly coerced wealthy Saudis and businesses to buy into the IPO.
  •  The government itself propped up the IPO by contributing at least $2 billion.
  •  The first two days of trading saw immediate jumps in price by 10% each day, initiating the exchange’s automatic cap on trading. The quick surge in pricing both days does not seem realistic or reasonable to most experienced international investors. It seems too artificial or the sign of an unreasonable local hysteria.
  • There were advertisements in Saudi Arabia promoting the IPO in the leadup to the event, hyping Aramco stock with wild, unprovable and sometimes demonstrably false claims. One ad told citizens not to hesitate, because the value of Aramco stock would triple. 
  • The government has incentivized retail investors in the IPO with a promise of 10% additional shares if they hold their positions for at least six months.
  • The authoritarian government generally operates by centralized planning and coercion, so this behavior is almost expected.

Now, there is renewed talk of an upcoming listing of Aramco on an international exchange, perhaps in Japan or China. Unlike the Tadawul listing, this would require eager international investors. It seems reasonable that Aramco and the Saudi government would want to show a high Tadawul price for Aramco prior to an international listing, but this strategy won’t work now that international investors believe the Tadawul-listed price for Aramco is vastly inflated by government interference. International investors are now too suspicious, and they will be hesitant to go near Aramco at this price—unless the government steps back and demonstrates decisively that it can restrain its natural tendency to interfere with the market and the company. 

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