My ambivalent relationship with LinkedIn (LNKD) spans nearly a decade. I was one of the first one million people to sign up on LinkedIn in 2004, for whatever that's worth, and I understood clearly the potential value of having such a widely adopted platform. I liked the concept but I never saw a good reason to pay for a Premium account, especially when much the same information could be had for free if one was willing to spend a little time searching.
Last year I began branching out into a new business, completely unconnected with my research firm, namely helping to make introductions and raise capital for some friends in alternative private equity/private debt firms, so I decided to give LinkedIn a complete test drive. Eight years on, I finally got my profile to 100%, I signed up for a Premium account, and I began inviting people I knew and even a few I didn't.
I made the big mistake of inviting Reid Hoffman, founder of LinkedIn, whom I don't know, to connect, following which I received a stern e-mail warning that such uninvited requests would lead LinkedIn to shut down my account. In light of that chilling response to what I thought was an innocent invitation, I became firmly persuaded that LinkedIn stringently monitored the "trusted contacts" feature of its site. One can then well imagine my delight and surprise when I received an invitation a few weeks later from Abdullatif bin Ahmed Al Othman, the former Chairman of Sadara Chemical Company, in Saudi Arabia. According to the invitation, Abdullatif was connected to two people I had known for a very long time, so it was clear that he could be trusted.
It took me about two seconds to press the "accept" button. Literally falling into my lap, I thought, was potentially a whole new group of Saudi Arabian connections. If Abdullatif thought well enough to connect with me and two of my friends, it did not seem a reach that he would be inclined to introduce me to a few of his friends. Maybe he would introduce me to some Family Offices in Saudi Arabia who were looking for great alternative Private investments in the US, or perhaps even to some Sovereign Wealth Funds. I tried not to let my imagination run wild too much, but it is fair to say that I had high hopes that I would open doors for my new Saudi Arabian friend and that he would open doors for me. So I constructed a thoughtful introductory e-mail, thanking Abdullatif for inviting me to connect and suggested that we might chat by phone for a few minutes.
And then the e-mail bounced back - user unknown.
It was a sad and disconfirming moment for me. Along with being unhappy at the prospect of being duped for reasons unknown, I wondered how two long-time and trusted friends, both shrewd Wall Street guys, had been taken in. They aren't the sort to respond to e-mails from Nigerian bankers claiming that $10 million is waiting for them if they deposit $20,000 into an offshore account. I assumed they had done some due diligence, or that they actually knew the guy. After all, trust is the very foundation of LinkedIn, and this incident seemed to shake that foundation to its very core.
I did a minimal amount of research: First, I did a Google search of Abdullatif, I looked at his company's web site, and then I reviewed all 66 of his connections, about which I noticed a few oddities. For starters, none of his contacts were Saudis or even from the Middle East. I sent an e-mail to LinkedIn's customer support and received a polite auto-generated response. Then I e-mailed both of my friends and warned them that Abdullatif might not be real.
A few days later I received a reply from my one of my friends who thanked me (sort of) for pointing out the irregularities and said that he had "nuked him." The other friend never responded in any way. I have come to find that not responding is normal and common LinkedIn user behavior. For every zealous user of LinkedIn who checks in frequently, posts updates and maintains constant contact with connections, there are probably an equal or greater number who have a LinkedIn account but hardly ever use it or think about it. They interact with LinkedIn the way I did for the first 8 years or so - passively accepting invitations just to be polite but not really opening it on a daily basis the way I think Facebook (FB) users do. That is a gross oversimplification, and clearly there are lots of Facebook users who are extremely passive too. But LinkedIn, almost by definition, speaks to our professional lives, while Facebook cuts to the core of personal friendships and relationships. Most people are a lot less engaged by professional contacts than personal ones.
A couple of days later, by which time Abdullatif had 80 connections, I received another polite and brief message from LinkedIn telling me they were still investigating. I responded that the matter was one of some urgency and that something was terribly wrong, after which I got the following (final) response from LinkedIn:
Thank you for the update and thank you for being a valued member of our LinkedIn community!
LinkedIn Privacy Team"
That was it. I never heard back from LinkedIn again. A couple of weeks later Abdullatif's profile, now with more than 100 contacts, was quietly removed from the site, and a few days after that I noticed that his name had disappeared from my contact list as well. No one ever wrote back to say what had happened, how 100+ LinkedIn members had been swindled into connecting with an obvious fraud, or how it was apparently so easy for someone to create a fake profile and convince a significant number of intelligent and well-connected members to connect with someone who could clearly not be trusted.
This long-winded, but true, story about Abdullatif has solidified many of my feelings about LinkedIn and its valuation as a public company:
1) LinkedIn is run by humans, not machines, and humans are prone to make mistakes. For all the company's high tech algorithms and ability to identify individuals I seem to know even though I barely met them, LinkedIn connections are clearly not actively policed even by their well-trained Privacy Team. LinkedIn should have better ways to weed out frauds - perhaps by offering members a reward. As of now there appears to be no incentive for anyone to turn in the bad guys.
2) LinkedIn connections have little to no true value. At last count, I am closing in on 800 contacts, but I have discovered that my contacts do not accord me any special status or even (sadly) the promise of a polite or timely response. LinkedIn should create an "Inner Circle" which would truly be a trusted group of people - probably no more than 20 - who you could call upon to faithfully answer your e-mails, respond to your requests, no matter how frivolous, and go the extra mile to help you out if you need help. There would be some value in belonging to someone's Inner Circle. Right now, just having or being one of 800 contacts has virtually no value to anyone, except arguably LinkedIn itself.
3) LinkedIn has probably saturated the US market. I admit that I don't have any hard figures to back up this assertion, but it feels to me that after nearly 10 years, my connection requests are slowing down, not speeding up. Those who wanted to join LinkedIn and saw a reason to do so have probably already joined, and those who don't want to join LinkedIn probably never will.
4) LinkedIn membership roster needs a lot of cleaning up. I wish I had a penny for every LinkedIn member with 0 or 1 connections - I would be quite rich. I know a couple of people who maintain pseudo-identities on LinkedIn. I am also connected to several people who have multiple profiles. My guess is that at some point those people wanted to disconnect from a number of their connections but did not want to advertise that fact, so they created a new profile and started over. I am in some cases connected to legacy profiles that have not changed in years, while I have not been invited to join the new profile. It only hurts when I think about it.
5) LinkedIn's mobile platform is different in several important ways from the web version, and there are things that the mobile version will let you do that the web version won't (and vice versa). I won't go into details, in case someone from LinkedIn reads this and closes the loopholes, but suffice it to say that the mobile and web versions are not the same.
So here is my bottom line: I think LinkedIn is sometimes a useful tool, but it has some glaring problems, as noted above. If the company's stock price is bolstered at least in part by the phenomenal numbers of members joining every second, investors should take a hard look at those assertions. Speaking of those members with 0 or 1 connection, why are there so many? I really don't know, but I do not think they should be counted among the 200 million membership. Likewise, I do not think LinkedIn should count anyone who has not logged in to their account in more than a year. With those changes, investors might get a more accurate count of members.
I have read thoughtful articles from several brilliant Seeking Alpha contributors who explain how LinkedIn's valuation is either reasonable or unreasonable based on solid quantitative analyses. I have little to contribute to those arguments except to point out that making assumptions of continuous growth for several years out into the future is a dangerous game. Growth is nearly always lumpy and unpredictable, and I personally have never felt comfortable recommending a stock based solely on discounted cash flow models that project 5 to 10 years out.
Ultimately, my belief that LinkedIn shares are currently grossly overvalued is based mostly on my personal experience with the company over the past 9 years, and by comparing it to the market caps of other companies I know. Consider this: LinkedIn is now one of the largest 325 companies in the US by market cap - approximately $19 billion, which is greater than Aetna, Symantec, Whole Foods and Ralph Lauren. In fact, LinkedIn is currently larger than Tiffany and Southwest Airlines combined. I have a hard time understanding how a rational investor could get comfortable with such an obvious disparity between valuation and profitability.
If I owned LinkedIn shares, I would sell them and feel good about it, even if the share price soared another 100 points before irrational exuberance were replaced by cold, hard analysis. Such a day will surely come and the exits will be blocked; better to take the money now and run. Maybe LinkedIn will continue to grow revenues at a ridiculous rate for several years, enough to justify the trailing twelve month P/E of 900. And maybe investors truly believe that all of LinkedIn's 200 million members are real, that Premium subscriptions will continue to grow at a rate of 80%, and that LinkedIn Influencers will continue to be a big driver of growth going forward. Well if so, I would like to introduce you to my good and trusted friend Abdullatif bin Ahmed Al Othman.
By the way, if you do know any HNW individuals or Family Offices in the Middle East who are interested in some superior private investments in the alternatives space, I would be glad to connect. It might be easier just to send me an e-mail.