Stock Talk Podcast Episode 292 Show Notes

You are listening to KeyStone’s Stock Talk Show – Episode 292

Great to chat with you again this week. Just ahead of our first Live Webinars of 2025 – April 3rd and 8th.  I will begin with our Star of the Week, Argan, Inc. (AGX:NYSE), is primarily an engineering and construction firm involved in Power Industry – specifically, the company focusses on the engineering, procurement and construction of natural gas-fired power plants and renewable energy facilities. A recommendation one year ago to our US Small-Cap clients, the stock is our Star of the Week having jump from $49 to $130, up 160% in 52 weeks. In our YSOT segment, Brett starts with a viewer question on recent IPO, Coreweave (CRWV:NASDAQ), a company uses proprietary software and cloud services to deliver complex AI infrastructure at scale. Using Coreweave as an example, Brett shows us the current weakness in the IPO market and let’s you know if the stock is an opportunity or one to avoid based on its current fundamentals. Finally, Brennan will chat to us about holding periods and Canadian Fashion giant Lululemon Athletica Inc. (LULU:NASDAQ) – does the stock offer value after a recent pullback on the heals of its Q4 numbers, Brennan let’s you know.

Let’s get to the show –my cohost, Mr. Aaron Dunn is traveling through Italy (luck him), but fortunately I have the killer B’s, Brett and Brennan here to rescue the show.

Poll Question

The Decline of Long-term Investing

I spoke with a client last week about how Investor Holding Periods are declining and thought it was an interesting phenomenon, so I got him to send over some articles on the matter and also did some research on my own. And I found this article which was published on December 2021 from the World Economic Forum which is titled “Long-term Investing: What are the reasons behind its decline?”… and up on the screen I show an image of the change in holding periods, where back in the 1950-1960’s holding periods were between 5-8 years, but more recently in the 21st century has declined to below a holding period of 1 year.

So I thought I would quickly go through what this article indicates is driving the change:

1. Technology advancement – this includes automated trading systems which have greatly increased the number of trades that can be processed each day. And this also includes High-Frequency Trading (HFT), which as of today represents 50% of trading volume in the U.S. equity markets (so this is definitely the biggest factor). Social media and information overload has also led investors to become more active – rather than buying and holding stocks long term, it is evidently making people more reactive to their investment decisions.
2. Lowered cost of transactions – As one may be more prone to executing a trade if they know they are charged low commissions or none at all.
3. Corporate Longevity is in decline – where “In 1970, companies that were included in the S&P 500 had an average tenure of 35 years. By 2018, average tenure was down to 20 years, and by 2030, it’s expected to fall below 15 years.”

So altogether these are generally the factors which are creating holding periods to decline.

And to conclude this little section, this week we are going to create a poll on Youtube to see what our listener’s believe their average holding periods are for their equity investments. So please look out for the poll and vote in it!

Argan, Inc. (AGX:NYSE) – Star of the Week

Argan Inc. (AGX) is primarily a construction firm involved in Power Industry Services (74%), Industrial Construction Services (23.5%), and Telecommunications (2.5%) that conducts operations through its wholly owned subsidiaries. The company provides a full range of engineering, procurement, construction, commissioning, maintenance, project development, and technical consulting services to the power generation market. Argan’s service offerings focus on the engineering, procurement and construction of natural gas-fired power plants and renewable energy facilities.

The stock surged 25% on March 28th, following the release of very strong Q4 and FY 2024 numbers.  Our clients will be happy to know that in the one year since our recommendation, the stock is up the 161%.

I have seen a few analysts suggest Argan was a stock to buy in the wake of a Trump won – the theory being “ in terms of the construction and engineering sector generally which Argan is a part of, Trump is aiming to charter 10 new cities on underdeveloped federal land and streamline approval for infrastructure projects. Essentially – his policies are good for energy infrastructure projects.

The more tangible reason is blowout earnings and a jump in backlog:

The company smashed analyst’s consensus earnings estimates and easily beat the most optimistic street estimates on revenues in its Q4 2024 results. This drove the stock higher. The gains, in a tough market are really just a continuation of this trend, positive outlook in quarterly calls from management and backlog moving to record levels from significant contract wins.

Let’s take a closer look at the just released Q4 numbers:

• Revenues up 41%
• Earnings up 161%
• Gross margin was up from 14.4 to 20.5% (this is something we were monitoring).
• EBITDA up, and the dividend was increased – both significantly.

Growth across the board as well.

Let’s take a look at a key driver moving forward – strong contract wins in quarter pushed the backlog to just under $1.4 billion.

Backlog

Backlog grew to roughly $1.4 billion at January 31, 2025, and included full notices to proceed on a 700 MW combined-cycle natural gas project in the U.S. and a 300 MW biofuel power plant in Ireland. Following the close of the fourth quarter, the company executed a signed contract for a 1.2 GW ultra-efficient natural gas-fired power plant project in Texas. Management commented that as the company kicks off fiscal 2026, they are encouraged by the number of additional opportunities in the marketplace.

Balance Sheet

Management also stated that the addition of high energy demand data centers, the onshoring of manufacturing operations and the expansion of electric vehicle use are primary drivers of the increasing forecasts of future electrical power demands and the robust pipeline of new business opportunities. One of the elements that attracted us to Argan – which is a more volatile business than we traditionally recommend given the contract driven nature of its work – was the very strong balance sheet that continues to strengthen.

Valuations

These the current consensus estimates for AGX in FY 2026 and FY 2027. We note a slight expected decline in 2026 followed by a significant uptick in 2027 – this may be project ramp up costs initially factoring in. However, we note that the consensus comes from only two analysts and the consensus estimate for FY 2025 mid 2024 calendar year was $4.27 which badly missed actual EPS of $6.15 – so I am not sure if we can put a great deal of weight on these estimates. Directionally, we see positives.

Conclusion

• Clients will be updated over the next week.
• The 160% gain in one year, makes Argan our Star of the Week!

YSOT CoreWeave (CRWV:NASDAQ) – Viewer Question

Before we get into coreweave I just want to show how weak the IPO market has been. We had 2021 the year of the SPAC and since then the IPOs have been floundering by both dollar value and count.  Coreweave was a headline IPO for 2025.

Company Description

Coreweave symbol CRWV on the Nasdaq is an AI hyperscaler. The company uses proprietary software and cloud services to deliver complex AI infrastructure at scale. Simply, they build AI focus data centers, and they have over 250,000 GPUs across 32 data centers, with 1.3 GigaWatts of contracted power. The company is an AI pureplay trying to capitalize on the AI boom, which requires immense computing power. They currently have relationships with big names like Microsoft, Meta, OpenAI

Price & Market Cap

The IPO was disappointing for investors in the company as well as as an indicator for the broader IPO market. Initially the company was targeting a price range of $47 to $55. However, the stock ended up listing at $40.00 a share and closed at $40.00 a share after the first day of trading.

However, Monday Morning as we record the stock has fallen roughly 8% and is currently trading at $37 a share resulting in a market cap of $17.5 billion. That is about 28% lower than the mid point of the IPO range a week ago, so not great for holders. I will say though it is quite normal for post IPOs to be quite volatile, and with the market already being so volatile especially tech names, an 8% drop isn’t the most surprising regardless of the company. And by the time youre watching this I would not be surprised if the price is quite a bit different one way or the other.

Moving to the financials for 2024:

• The company had revenue of $1.9 billion, significantly higher than the prior year’s $229 million, clearly putting it into the growth company category.
• A gross margin of $1.4 billion, a 74% gross margin. The main cost of revenues being electricity, rent, and related labour.
• The big cost after that is Technology and Infrastructure of $961 million, this is the electrical and computing components depreciation expense, which are the main capital expenditures for the company. The company invested $8.7 billion in cash, roughly half the current market cap into PPE, and internal software last year.
• Net loss was $863 million for the year
• Looking at adjusted EBITDA it appears much better than net income at $1.2 billion as you remove the significant depreciation expense of $863 million materially the same as the net loss, as well as fair value adjustments for derivatives, warrants convertible notes of $756 million, and interest expense of $361 million being the big line items.

Balance Sheet

Moving to the Balance Sheet The pro-forma Net Debt position, so adjusting for the funds raised with the IPO, came in at $5.2 billion. The company used the IPO to pay down a billion in term loan  debt as well as providing $500 million of  collateral for the delayed drawn term loan facility, that is the jump in restricted cash. So effectively the IPO capital was used to lower the debt load. The loan facilities are floating, and had an effective interest rate of 14.1% and 10.5% for the first and second facility respectively. Further the company also finances its equipment which ranges from 9-11%. Overall not exactly cheap debt.

Using the pro-forma net debt and adjusted EBITDA for 2024, the company has a net debt-EBITDA of 4.2 times, quite high, especially given the IPO reducing the debt load.

Valuations

Using the 2024 figures and proforma net debt the company is trading at an EV/EBITDA of 18.6 times. Which does imply a continuance of significant growth. As well I will note here the weakness of using EBITDA as they are capital intensive business and EBITDA removes depreciation and further the depreciation value used likely does not represent the true change in asset value which I’ll get into in a minute. If you just look at the top line, the price/sales is 9.1 times, which is quite high as well, overall even though its trading well below the initially desired amount it still is a pricy business.

Risks

A couple risks I want to highlight that are core to the business.

The first risk,
The company’s GPU base is mostly Nvidia hopper GPUs, the current leading AI GPUs, but of course with technology that does change and can change very fast especially for leading edge products. Nvidias next generation Blackwell is expected to be available in the second half of this year, with initial Nvidia Benchmark results putting it at 2.2x and 2x Llama 2 and GPT 3 training compared to the H100 GPU. The point of this is, is that if Coreweave wants to keep up and be on the leading edge of AI they need to invest capital and lots of it. The first hopper GPU, H100 was released in March 2023, so 3-years ago or 2-years for the refreshed h200, the company depreciates its technology equipment over 6 years, meaning any hopper GPU purchased now won’t be fully depreciated until the architecture is 9- years old, which is a long time. And the performance and efficiency of the architecture by then will likely be poor in comparison to the technology that comes.

So in my opinion likely understates the actual depreciation, meaning capital expenditure also needs to be higher than the financials show on the surface.

The second risk,
Is on the other side of the equation, AI training demand needs to continue to have high growth, the company references expected growth at 38% from 2023 until 2028 for the industry. Generally AI growth  I am much less concerned about, but to keep a high valuation like Coreweave has is you need underlying growth, if the industry as a whole stops running at break neck speed you will have issues, especially when the company is largely funded by debt. The AI boom is of course what is underpinning the bull thesis, AI use continues its rapid growth therefore training needs to be done therefore infrastructure is needed.

Conclusion

Coreweave has had a rough start, with its IPO hitting the market under initial pricing expectations and at least relatively early trading continues to move the stock lower. The business model is risky as it depends on rapid growth of AI demand, but can also be hindered by the need to have significant capital expenditure, which needs to be funded and if the IPO is an indicator the desire to fund the capital expenditure may be running out, or perhaps its just bad timing with a beaten down tech market.

But overall I don’t find coreweave appealing at this time since the debt load is significant, you have a high valuation, reliant on depreciating asset, but I will say they do have high growth at this time, I just don’t see the combination of risks and reward being worth while at this time.

We will continue to monitor the stock if it does become appealing, but for now we will sit on the sidelines.

Lululemon Athletica Inc. (LULU:NASDAQ) – Dog of the Week

Company Description:

Lululemon Athletica inc., designs, distributes, and retails technical athletic apparel, footwear, and accessories for women and men under the lululemon brand in the United States, Canada, Mexico, China, Hong Kong, and internationally.

As of February 2, 2025, the company had 767 company-operated stores, and approximately 75% of revenue was from the U.S, Canada and Mexico (which they define as the Americas), 13% from mainland China, and 12% for the rest of the world.

The stock is our dog of the week as its down 17% in the last two trading sessions… and has really had a difficult few years.. as in 2024, the company indicated it faced a series of challenges which were impacting growth, including product-related headwinds, weaker U.S. Sales, increased competition and general macro headwinds.

So lets dig deeper into the recent results and the recent drop in the share price

FY & Q4 2024 Results

Looking at the recent financial results for the Q4 and FY 2024 results, ended February 2, 2025 (KEEP in mind all results are in USD).

• Revenue increased 11% on a constant currency basis to $10.6B for the year. With revenue from the Americas increasing 4%, while international revenue increased 36%.
• Comparable sales increased 4% overall, with a decrease of 1% in the Americas while international sales increased 24% on a constant currency basis.
• Growth in EPS for the year remained robust, with an increase of 20%.

To put this growth in relation to its longer-term trend, revenue has grown with a CAGR of 22% over the past 5 years, while EPS has grown at a rate of 24% over the same period….so we have certainly seen growth slowing.

Balance Sheet

The balance sheet remains healthy with cash of $1.98 Billion, with no debt, but leases of $1.58B, providing a net cash position of approximately $400M or $3.29 per share. So overall the balance sheet remains healthy.

FY 2025 Guidance

Now the primary reason for the recent drop in share price was the company’s FY 2025 guidance, as the company is looking to grow revenue in the year to approximately $11.2 Billion, which represents growth of 7-8% if we exclude the 53rd week of 2024… while Diluted EPS is expected to grow to $15.05 per share at the midpoint, which is expected to be growth of 3%…

And in relation to the slowed growth in EPS, this does not include the impact of any share repurchases that the company may conduct over the course of the fiscal year, but does include the expectation for gross margins to decrease approximately 60 basis points versus 2024 driven by deleverage on fixed costs, FX headwinds, and the impact of increased tariffs related to China and Mexico.

Again, as I noted previously, revenue has grown with a CAGR of 22% over the past 5 years, while EPS has grown at a rate of 24% over the same period. So seeing this slowdown, the stock has Sold-Off further.

Valuations

Given these growth concerns, we are certainly seeing the price-to-earnings multiple of the business compress, with a median P/E Multiple of 41x over the past decade. While it is currently trading at approximately 20x trailing earnings and about 19x forward earnings.

This is something that we have highlighted many times when paying for an “elevated” valuation multiple for a business. As if growth slows, we can see a stock price fall due to a compression in the valuation multiple.

Conclusion

And overall, Tariff and potential inflation concerns have led to a decline in Consumer Confidence back toward 2022 lows, suggesting worries about the economy and labour market are impacting consumers pocket book.

As such, the slowing growth and ongoing uncertainty have made Lululemon our dog of the week. Now generally I should add, LULU is a company which I would love to own given its strong fundamentals, but I believe the stock price may continue to have some pressure on it, and I would like to see some indication of growth returning before I would invest.