Dear Mr. Berko:
Last July, my broker had me buy 700 shares of Dendreon at $7. It has done nothing. Should I sell it?
Now he wants me to buy 100 shares of ServiceNow, which he says is an excellent long-term investment. Could I also have your opinion on this one?
T.P., Wilmington, N.C.
ServiceNow Inc. (NOW-$31.89) is an information technology management firm with less than $240 million in revenues deriving from a proprietary platform that automates work flow and integrates related business processes. Well, yipsee doodle dandy and ain’t that sweet! NOW’s proprietary platform is an enormous library of cloud apps, providing a process on nearly everything – toilet management, incident management, problem management, dress code management, change management, release management, hygiene management, configuration management, bad-breath management, knowledge management, project management, lumbago management, service management, cost management, portfolio management and turning-off-the-lights-at-night management. This specious company employs 998 people, has a market capitalization of $3.7 billion, hasn’t made a profit since the Great Flood and may not earn a dime until the Resurrection.
NOW is an example of Wall Street’s diving into colostomy bags and scrounging for nonpublic companies that turn garbage into nearly edible products, for a new initial public offering that can be peddled to investors. NOW is nothing to write home about. There’s a swarm of nearly identical companies, with nearly identical apps, producing nearly identical outcomes, soliciting nearly identical clients and duking it out for survival in the marketplace. I don’t see anything unique or compelling about this company.
NOW’s management, like the management teams of its zillion brethren, believes that its platforms of super-apps are unrivaled, nonpareil and absolute. It may be right. But I’ve news for this throng of app-loving lads: Without the ability to produce earnings, their companies are just two pieces of white bread with a slice of baloney in between. A company without earnings is like a Mack truck without tires; it ain’t going nowhere unless someone, with a great deal of effort, pushes it. Calling NOW an “excellent long-term investment” is dishonest, but that’s how Wall Street generates revenues. I am a value investor and respect the time-honored Graham and Dodd principles. NOW is a rank speculation (certainly not an investment) burning cash like a prairie fire, and there’s no app in the galaxy that could protect you if NOW were to fall to $20.
Dendreon Corp. (DNDN-$5.49) is one of the many stocks I kind of watch from the far distance. Frankly, I don’t know why, because there is an exponential increase of new companies with the same bio-business model competing, in the cellular immunotherapy business, for an arithmetic decline in research dollars. However, every once in a while, a flare will flicker a little brighter on the horizon, and sometimes, when I look closely, it’s Dendreon. But a little less than every once in a while, DNDN makes the medical news with a carcinoembryonic antigen, a carbonic anhydrase or a new small molecule, and its stock price will spike.
A promising cancer drug that got Food and Drug Administration approval in April 2009 caused one of those spikes; it pushed DNDN to $56 a share. And smaller spikes in the past have made this stock an interesting speculation. DNDN licenses its novel therapeutics, which last year took in $325 million, but its profit potential is always scuppered by huge research and development expenses plus selling and administration costs. DNDN has a 1,500-person payroll, has been a public company for a dozen years, burns cash like trash, hasn’t made a dime since before the turn of the century and has accumulated more than $1.6 billion of losses. But if you like to play craps, DNDN could be a fun issue with which to roll the dice. An occasional rumor of a new drug discovery, a merger with another biotech or even its acquisition by a major or semi-major pharmaceutical company keeps DNDN interesting. If you sell your 700 shares, I can almost guarantee that within a month, it will trade 10 points higher. Keep them.