What the Buffett Indicator Says about Aramco’s Valuation

  • The market-cap-to-GDP ratio, also known as the Warren Buffett indicator, could offer some insight into Saudi Aramco’s valuation and Saudi Arabia’s economy. Saudi Arabia recently filed the prospectus for Aramco’s IPO.

The Warren Buffett indicator tells us about equity markets’ valuation. In a 2001 Fortune essay, the legendary investor wrote that the metric is “probably the best single measure of where valuations stand at any given moment.” For instance, it spiked before the dot.com bust and then again before the 2008 financial crisis. In a nutshell, the Buffett indicator tells us about any “irrational exuberance” in equity markets. After all, equity markets ultimately reflect corporate earnings, which depend on economic activity, or GDP.

Saudi Aramco’s IPO

This month, after several false starts, Saudi Arabia finally announced Saudi Aramco’s IPO. The announcement came a week after ISIS leader Abu Bakr al-Baghdadi’s death. In its IPO prospectus, Saudi Aramco listed terrorist attacks as a key threat. Other threats listed included electric vehicles and ride-sharing.

Previously, Saudi Arabia was expecting a valuation of around $2 trillion for Aramco. Aramco’s valuation could be much lower now, given crude oil prices’ sluggishness. However, Aramco might still become the largest company by market capitalization, outdoing the likes of Apple (AAPL) and Microsoft (MSFT).

The Warren Buffett indicator and Aramco’s valuation

Bankers expect Aramco’s valuation to be as high as $1.5 trillion, doubling Saudi Arabia’s GDP. That’s a flashing red sign based on the Buffett indicator’s action before the dot.com bust and the 2008 sell-off.

Looking beyond the numbers

The Buffett indicator could also be seen as representing the Saudi economy’s potential. So far, Saudi Arabia’s economy has been largely dependent on oil. The country plans to use the cash from the Aramco divestiture to develop other economic sectors.

Interestingly, some analysts see Aramco as the next Apple. Read Why Saudi Arabia’s Aramco Won’t Be the Next Apple to learn more.