Two-thousand-nineteen was the tale of two marquee stock offerings: America’s Uber and Saudi Arabia’s Aramco, the world’s biggest oil company. Superficially, Uber is a failure, and Aramco is a success: Uber stock sank; Aramco stock rose. But really, it’s the other way around. Uber’s “failure” shows the success of American-style free markets in disciplining companies.
Uber went public in May on the New York Stock Exchange. This initial public offering allowed general investors, rather than just wealthy people and institutions, to purchase shares in the ride-hailing company.
The public was cold. Uber stock crashed to $30 last Friday, down from $45 at its IPO. Though the losses are sad for investors, they are vital to free markets. In a decade, Uber has never made a profit: It lost $1.2 billion last quarter. Nor has it ever made a credible pitch of how it will eventually be profitable.
Uber got urbanites hooked on car rides by subsidizing the price of the trips below what most people could pay. It’s trying to do the same with food deliveries.
For years, Uber raised money to subsidize its losses from supposedly sophisticated institutions (such as the Saudi government) by convincing them it was worth a certain price; each new round of big investors paid a higher price, keeping the charade going.
It was only when it ran out of such guileless investors that it had to go to public markets, where the truth finally came out. To list on the NYSE, Uber had to file reams of documents, including such statements as “we expect our operating expenses to increase significantly” and “we may not achieve profitability.”
Uber and its financial backers can no longer insist that it is worth $45 a share when the world can see, through minute-by-minute trading, that it is not.
Market pressure is blunt: Become profitable soonish — or go out of business. That’s a good thing; it’s not good for the economy (or urban traffic) for investors to keep throwing good money after bad.
Now look at Aramco, Saudi Arabia’s flagship oil company. Earlier this month, Aramco went public on the Saudi market.
Last year, Crown Prince Mohammad bin Salman had wanted Aramco to go public on the New York or London exchange, but Aramco decided against it, partly because it didn’t want to publicly detail all of its “risk factors,” as Uber had to do.
But MBS did insist on one vanity boasting point: a $2 trillion valuation, to make it the world’s most valuable traded company. How did he get it?Well, his associates strongly “encouraged” wealthy Saudis to buy in, so that their money would prop up the price. “They’ve been told it is their duty, and everyone understands what that means,” one financial adviser to wealthy Saudis told The Financial Times (hint: less risk of beheading).
“This is another Ritz, through different means,” one banker told the paper, referring to the 2017 detention of hundreds of well-connected Saudis at the luxury hotel, where many had to give up a share of their wealth to buy their freedom.
Behold: On Day Two of trading, Aramco reached that coveted $2 trillion value, and it has remained above its IPO price.
Aramco isn’t going out of business anytime soon. Unlike Uber, it is, unsurprisingly, profitable, since its business is selling the world’s cheapest-to-produce high-quality oil.
But despite MBS’s pretensions to market reforms, it isn’t a free-market company, nor will it be. It is a state-controlled entity that can divert its “profits” back to the state whenever it feels like it.
Over the past four decades, Western policymakers and pundits have often confused globalization with free-market capitalism. Saudi Arabia participates in global markets, as do China and other non-market states.
But a “successful” stock-exchange listing doesn’t equal free-market capitalism, and coerced investors don’t reveal true prices. Real capitalism means the stock can go down to zero, and nobody in the government cares enough to unsheathe the scimitar.
This piece originally appeared at the New York Post
Photo: Spencer Platt / Getty Images