‘Too much, too soon’: A Wall Street firm is urging investors to dump Saudi Aramco’s stock as the company’s valuation spikes above $2 trillion

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  • Saudi Aramco has smashed multiple records since its initial public offering earlier this week.
  • That means investors should take profits now, according to analysts at Bernstein, which forecasts that the company’s valuation could fall as much as 28%.
  • “For investors who have benefited so far, we would take profit here,” Bernstein wrote in the note. “For those who have not, we would wait until a better entry point, which will inevitably come.”
  • Watch Aramco trade live on Markets Insider.

Oil giant Saudi Aramco has had a blockbuster first few days of trading on the public market.

On Wednesday, shares soared 10%, and early Thursday, Aramco surged to a market value of $US2 trillion, becoming the first-ever public company to hit the milestone.

But the company’s first-day jump was “too much, too soon,” according to Neil Beveridge and Oswald Clint of Bernstein, and it’s time to sell. The firm initiated coverage of the company on Thursday with an “underperform” rating and a target price of 25.50 riyals.

“For investors who have benefited so far, we would take profit here,” the Bernstein analysts wrote in the Thursday note. “For those who have not, we would wait until a better entry point, which will inevitably come.”

Going forward, Saudi Aramco’s huge valuation could fall by as much as 28% due to risks such as the Saudi government’s control of the company and weak oil prices, the analysts wrote.

“Saudi Aramco is the largest, most profitable oil company in the world – but size is not everything,” the analysts wrote. They value Aramco at $US1.36 trillion based on an 8.5% discount rate, oil at $US70 per barrel, and a forecast of a 1% growth rate, according to the note.

Still, “Aramco could trade in a league of its own for some time,” the analysts wrote, meaning that investors have some leeway before the valuation drops.

That’s because it’s difficult to short stocks listed on the Saudi Tadawul stock exchange, and selling pressure will initially be low given that Saudi institutional investors “are being urged to support the listing,” according to the note.

But eventually, “Aramco should trade at a discount rather than premium to international oil majors,” analysts said.

Based on the company’s closing valuation of $US1.88 trillion Wednesday, Aramco has an organic free cash flow yield of 3.9% and dividend yield of 4%, “which is significantly lower than most other global oil majors which currently yield around 6%,” the analysts wrote.