Saudi Aramco IPO and the Network Effect
Saudi Aramco’s IPO is looking to be the world’s biggest IPO, with valuations of about 1.6-1.7 trillion USD, down from the 2 trillion USD original expectation of Saudi Crown Prince Mohammed bin Salman. While originally at a 2 trillion USD valuation, the decrease in price points to the risks of investing in Saudi Aramco. While crude oil is a large industry, and Saudi Aramco has an edge in having low production costs while a very large network of customers for it to export its oil, making Saudi Aramco the world’s highest revenue producing company at around 110 billion USD, compared to the next highest Apple at around 60 billion USD. Part of the uncertainty in valuation of Saudi Aramco comes from the recent terrorist attacks in September, which halved their output and decreased their third quarter profit by 30%. International investors have signaled that a valuation of between 1 trillion to 1.5 trillion would be more favorable for investing. Even though the company is partly state owned, they are trying to compensate investors with a higher dividend yield, which they can do with a lower valuation.
A publicly traded company’s valuation is determined by many analysts, and depending on the method of valuation, there can be different interpretations on what a company is worth. In the case of Saudi Aramco, pricing is especially important because it will dictate the amount of interest in the purchasing of its stocks. This is similar to the relationships between the reservation price of a good and the fraction of the population that will purchase it. This is influenced by stuff such as the network effect, as the more that a company’s stock is purchased, the more that it benefits others as the company has cash at hand, and is able to use that to invest back in the company in capital expenditures. For the side of the company like Saudi Aramco, the more people who are in its network, the cheaper it is for Saudi Aramco to operate and they can bring in more income by selling to a greater consumer base. The network effect is shown because more people benefit directly when more people purchase this product. In this case, the stock purchases benefit the company which goes back to the people. It is more complicated in real life, but some concepts from Networks are shown through Saudi Aramco’s IPO.