Baron Technology Fund | Q4 2024

During the fourth quarter, Baron Technology Fund® (the Fund) rose 15.85% (Institutional Shares), outperforming the MSCI ACWI Information Technology Index (the Benchmark), which increased 4.28%, and the broader S&P 500 Index, which rose 2.41%. For the full year 2024, the Fund posted a robust gain, increasing 47.80%, materially outperforming the Benchmark, which rose 31.59%, and the S&P 500 Index, which appreciated 25.02%.

We are pleased to report that the Fund delivered outstanding performance in both the fourth quarter and full year 2024, reflecting the success of our investment philosophy and our focus on identifying innovative companies reshaping their industries. For the fourth quarter, the Fund outperformed its Benchmark by an impressive 1,157 basis points and exceeded its Morningstar peer group average by 989 basis points. This strong finish capped a robust year, with the Fund outperforming the Benchmark by 1,621 basis points and peers by 2,584 basis points, earning a second percentile rank among its Morningstar peer group.*

As we celebrate the Fund’s three-year anniversary, we are proud of its resilience and long-term results. Despite navigating a challenging 2022 backdrop for the technology space and our Fund, we ended the three-year period in the top 14% of our Morningstar peer group, outperforming the peer group average by 711 basis points, on an annualized basis. This performance underscores our long-term focus and ability to manage through adversity and position the portfolio for differentiated growth and returns versus our peer group.

*As of 12/31/2024, the annualized returns of the Morningstar Technology Category average were 21.96% and 3.27% for the 1-year and since inception (12/31/2021) periods, respectively.

As of 12/31/2024, Morningstar Technology Category consisted of 271 and 239 share classes for the 1- and 3-year periods, respectively. Morningstar ranked Baron Technology Fund in the 2nd and 14th percentiles for the 1- and 3-year periods, respectively.

Morningstar calculates the Morningstar Large Growth Category Average performance and rankings using its Fractional Weighting methodology. Morningstar rankings are based on total returns and do not include sales charges. Total returns do account for management, administrative, and 12b-1 fees and other costs automatically deducted from fund assets.

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Drivers of Performance in 2024 and the Fourth Quarter

The Fund’s outperformance in 2024 and the fourth quarter was the result of several key factors:

• Broader Technology Universe: For 2024, the Fund’s exposure to non-Information Technology (IT) stocks accounted for 50% of our outperformance versus the Benchmark, while 32% came from stock selection within the IT sector. The remaining relative gains came from underweight positions in certain IT specific industries, such as software, IT services, electronic equipment instruments and components, and technology hardware storage & peripherals, all of which trailed the Benchmark in the period.
• Strategic Positioning in Emerging Winners: Our investment strategy is to blend and balance investments in established leaders, like Amazon.com, Inc., NVIDIA Corporation, and Broadcom Inc., among others, with emerging winners–businesses with competitive traction on the steep part of the growth S-curve and long runways for future growth. Our stock selection in mid- and small-cap stocks (30% portfolio weight versus 25% and 9% for our Morningstar peer group and Benchmark, respectively) contributed materially to our relative outperformance for the quarter and year.
• Differentiated Contributors to Relative Performance: The largest contributors to the Fund’s outperformance versus the Benchmark for the year included Reddit, Inc., Spotify Technology S.A., GDS Holdings Limited, Duolingo, Inc., Tesla, Inc., and The Trade Desk, all of which are high-growth, innovative companies. Notably, none of these names are Benchmark holdings, illustrating our commitment to finding differentiated opportunities, and Reddit, GDS, Duolingo, and Trade Desk are mid- or small-cap names. Other important contributors included companies like Axon Enterprise, Inc. and PAR Technology Corporation, both also absent from the Benchmark and further validation of our emerging-winner strategy.

Portfolio Construction and Sector Insights

The Fund continued to have a concentrated and high conviction approach, with approximately 57% of the portfolio in the top 10 names and 42 investments in total.

Among others, during the fourth quarter we initiated or increased positions in the following names:

• E-commerce: ODDITY Tech Ltd. and Amazon.com, Inc.
• Financial Technology: LPL Financial Holdings Inc.
• Software: Atlassian Corporation Plc and ServiceNow, Inc.
• Cybersecurity: Zscaler, Inc. and CyberArk Software Ltd.
• Digital Media: Spotify Technology S.A.
• Defense Technology: Zen Technologies Limited
• Semiconductors: HPSP Co., Ltd., indie Semiconductor, Inc., and Broadcom Inc.
• Communications Equipment: Arista Networks, Inc.
• Food Delivery: Zomato Limited

Reddit, Inc. is the largest forum-based social network, with over 97 million daily active users and 500 million monthly active users, primarily monetizing through advertising. Shares rose this quarter as Reddit delivered another exceptional quarter, exceeding expectations across key metrics. Daily active users grew 48% year-over-year and revenue surged 67% year- over-year – significantly outpacing social network peers. Adjusted EBITDA also came in ahead of expectations at a 27% margin, a dramatic turnaround from -9% in 2023. This operational improvement reflects both robust top-line growth and disciplined cost management. We see a substantial growth runway ahead for Reddit. User growth continues at a healthy clip, fueled by ongoing product enhancements and international expansion efforts, including the use of AI to translate Reddit’s massive corpus into multiple languages. Monetization per user remains low, with meaningful opportunities to introduce new ad products, increase ad load, enhance performance, and expand vertical coverage. Our checks suggest that Reddit continues to win new advertisers and capture larger budgets from existing ones, who value the platform’s unique reach, engaged user base, and strong price-performance. Additionally, Reddit has created a high-margin revenue stream by licensing its unique data to companies like OpenAI and Google for AI model training. Longer term, we believe Reddit’s business model has potential for even greater profitability, given that its growth roadmap requires relatively modest additional investment. Emerging opportunities include search monetization – where Reddit processes over 1 billion searches monthly – and a nascent user economy. We remain confident in Reddit’s ability to capitalize on its unique platform dynamics, drive strong growth, and deliver long-term value to shareholders.

Amazon.com, Inc. is the world’s largest retailer and leading provider of cloud infrastructure services through its Amazon Web Services (AWS) division. Shares increased in the quarter following a strong beat on operating profit, driven by robust results across its core North American retail, international retail, and AWS businesses. Management’s heightened focus on cost discipline and operational efficiency continues to yield tangible results, improving profitability across all segments. AWS delivered another solid quarter, with improving demand trends and an encouraging trajectory around generative AI use cases. While competition among cloud infrastructure hyperscalers remains intense, we believe AWS is well positioned to maintain and expand its leadership as developers and enterprise customers increasingly look to deploy generative AI workloads given its scale, technical expertise (including developing its own semiconductors), and open AI model ecosystem. Across its retail businesses, despite its pioneering leadership, Amazon remains in the early stages of capturing its vast total addressable market, as the company holds less than 15% market penetration globally. As our largest position, we remain confident in Amazon’s ability to execute on its long-term growth strategy and deliver meaningful value for shareholders.

Broadcom Inc. is a leading semiconductor and enterprise software company, with 60% of revenue derived from semiconductors and 40% from software. Shares increased in the quarter as investor confidence in Broadcom’s AI growth opportunity and strong execution across its diversified portfolio drove positive sentiment. Broadcom reported solid fiscal fourth-quarter results, with robust growth in semiconductor solutions and AI-related revenues reaching $12.2 billion for fiscal 2024. While software revenues were slightly below expectations due to delayed deal closings, the VMware integration has exceeded expectations, delivering rapid margin expansion and incremental EBITDA contributions ahead of schedule. This performance underscores Broadcom’s operational discipline and its ability to drive synergies from strategic acquisitions. The company’s leadership in networking technologies remains evident, with sustained growth in solutions like Tomahawk and Jericho supporting its competitive edge. Non-AI semiconductor segments also showed early signs of recovery, highlighting Broadcom’s diversified revenue streams. Broadcom’s estimated serviceable addressable market in AI, projected at $60 billion to $90 billion by fiscal 2027, primarily driven by major hyperscalers such as Google, Meta, and ByteDance, reinforces its potential to lead in the AI infrastructure market. We remain confident in Broadcom’s ability to capitalize on the secular growth of AI infrastructure, execute operationally, and sustain its leadership in key networking technologies.

ASML Holding N.V. is a Dutch company that designs and manufactures photolithography equipment, critical for semiconductor production. ASML is the clear leader in lithography technology and the sole manufacturer of extreme ultraviolet (EUV) lithography tools, which are essential for enabling advancements in chip performance and scaling. Shares declined during the quarter, reflecting reduced guidance for 2025 and investor concerns about potential impacts from U.S. government export restrictions and the possibility of peaking lithography intensity. While these challenges have created greater short-term uncertainty, we remain optimistic about ASML’s long-term prospects for growth. The secular demand for semiconductors, driven by trends such as the proliferation of AI, high-performance computing, and 5G communication, underpins a favorable industry outlook. While lithography’s share of semiconductor capital expenditure may moderate, we believe the increasing complexity and layer count of chips will sustain robust demand for ASML’s tools. As the sole provider of EUV technology – an essential enabler for next-generation chip designs – ASML occupies a critical position in the semiconductor supply chain. We view ASML as a unique, quasi-monopolistic asset within the semiconductor ecosystem, well positioned to benefit from long-term industry growth.

Lam Research Corporation is a leading global supplier of wafer fabrication equipment (WFE) and services to the semiconductor industry. The company specializes in etch and deposition process steps that are critical to the production of NAND and DRAM memory chips, as well as logic devices. Shares declined during the quarter amid continued negative sentiment toward WFE-related stocks, driven by concerns over restrictions on equipment shipments to China and muted industry demand outside of AI-related chips. Despite these near-term headwinds, we believe Lam is positioned at a pivotal inflection point that will drive significant long-term growth. The shift to gate-all-around transistor architectures in logic devices is creating increased demand for advanced deposition and etch processes, areas where Lam’s expertise is unparalleled. Additionally, the rise of high- bandwidth memory and advanced packaging solutions is driving the need for high-aspect-ratio etching, a market in which Lam commands nearly 100% share. These technological transitions underscore Lam’s critical role in enabling the next generation of semiconductor innovation. We also believe the market is undervaluing Lam’s earnings potential, as NAND WFE spending is poised to recover from one of the most severe downcycles in 2023. Lam’s leadership in advanced semiconductor manufacturing technologies and its ability to capture upside from recovering demand reinforce our confidence in its long-term growth trajectory. We remain optimistic about Lam’s ability to benefit from these structural shifts in the semiconductor industry and deliver meaningful value to shareholders over time.

Advanced Micro Devices, Inc. (AMD) is a global semiconductor company specializing in high-performance computing technologies, including CPUs, GPUs, and FPGAs. The company has historically demonstrated a strong ability to compete in diverse semiconductor markets. Shares declined during the quarter as investors questioned AMD’s competitive positioning in the rapidly evolving AI compute market, particularly against NVIDIA. While we recognize AMD’s progress in AI-related products, its slower execution compared to NVIDIA, coupled with uncertainties surrounding GPU adoption and revenue growth, led to a reassessment of our thesis. In the AI compute market, NVIDIA’s ability to deliver integrated hardware and software solutions has widened the gap, making it increasingly difficult for AMD to gain meaningful market share in the near-to-medium term. Given these dynamics, we made the decision to exit our position. We will continue to monitor AMD closely for signs of improvement in its ability compete more aggressively in systems and software in the AI compute market.

We invest in companies of any market capitalization that we believe will deliver durable growth from the development, advancement, and/or use of technology. We invest principally in U.S. securities but may invest up to 35% in non-U.S. securities.

At the end of the fourth quarter, the largest market cap holding in the Fund was $3.8 trillion and the smallest was $820 million. The median market cap of the Fund was $37.2 billion and the weighted average market cap was $1.2 trillion.

We had investments in 42 unique companies. Our top 10 positions accounted for 57.2% of net assets.

To end the quarter, the Fund had $56.0 million in net assets. Fund inflows were solid during the quarter.

* Individual weights may not sum to the displayed total due to rounding. 

This quarter, we initiated a position in Arista Networks, Inc., a leading provider of high-performance networking solutions for data centers, cloud providers, and enterprises. Arista’s advanced switching and routing platforms, powered by its proprietary software, offer enhanced scalability, automation, and flexibility. The company generates revenue through hardware sales bundled with software and post-contract support services, serving major cloud players like Microsoft and Meta, along with a growing range of enterprise customers.

The buildout of AI infrastructure is significantly more network-intensive than conventional data centers, as large numbers of compute systems need to interact with each other via backend networking switches. Additionally, these systems must connect to end users, similar to traditional data centers, creating a frontend networking opportunity. This dual requirement – backend for compute communication and frontend for user connectivity – creates a massive opportunity for networking solutions. Historically, the industry relied on InfiniBand networking exclusively provided by NVIDIA until 2024. However, a shift toward Ethernet-based networking is now underway. Arista, as the leading systems provider for complex networking workloads in traditional data centers at Microsoft and Meta, is well positioned to capitalize on this transition. Furthermore, as AI clusters expand, the complexity and dollar intensity of networking grows non-linearly, implying faster growth than compute components.

The key debate surrounding Arista is its AI-driven revenue potential in 2025. Our proprietary bottom-up analysis – factoring in AI chip shipments, backend networking for model training, and frontend infrastructure for user connectivity – suggests significant upside to current guidance and Street expectations. Beyond AI, Arista is poised to gain market share in the broader enterprise segment, taking business from larger incumbents. With its leadership in Ethernet switching and best-in-class software, Arista is well positioned to benefit from secular growth trends and long-term tailwinds, offering a compelling runway for revenue expansion and healthy stock returns.

We added to our position in Amazon.com, Inc. at the end of the quarter as we continue to see it as one of the best positioned companies heading into 2025. Please read the contributor section for more details.

During the fourth quarter, we initiated a position in CyberArk Software Ltd., an identity security platform that focuses primarily on privileged access management (PAM). CyberArk’s technology prevents bad actors from stealing and exploiting the credentials of “superuser” accounts like IT administrators, cybersecurity managers, and network administrators. CyberArk detects, stores, and manages all the privileged credentials in an organization, monitors the critical IT systems, and helps contain the damage a hacker can cause if they breach a corporate network. The increasing frequency and severity of ransomware attacks, heightening geopolitical tension, and stricter regulatory disclosure requirements for public companies that experience breaches have all made PAM a higher priority IT spend category. CyberArk is the market leader in the PAM sector, with over 25% share. The company also recently closed its acquisition of Venafi, an identity security vendor that helps companies secure machine identities, such as digital certificates and SSH keys, that facilitate computer-to-computer communication. The deal, which is accretive to CyberArk’s already healthy margins, makes CyberArk the most comprehensive identity solution in the market and expands the cross-sell opportunity. We see a long runway for organic growth, cross-sell synergy, and margin expansion, all of which should enable free cash flow per share to compound at an attractive rate and bode well for the stock.

We initiated a position in Zomato Limited, a leading food delivery platform in India with approximately 55% market share. Zomato is well positioned to capitalize on the structural growth of online food delivery in India, a market that remains significantly underpenetrated relative to global peers. After navigating a period of intense competition, the $50 billion Indian food delivery market has consolidated into a duopoly between Zomato and Swiggy. This industry structure supports a more rational pricing environment and sets the stage for sustained long-term profitability. We are also excited about Zomato’s fast-growing quick commerce segment, which is disrupting India’s traditional grocery retail industry by offering grocery and essentials delivery within 15 minutes of ordering. India’s total addressable grocery retail market exceeds $500 billion, yet this segment – called “quick commerce” – represents less than $10 billion in gross merchandise value. This provides a significant multi-year growth opportunity, with Zomato already emerging as a leader, holding approximately 40% market share in the quick commerce category. Zomato’s success in quick commerce is driven by its superior logistics infrastructure, focus on customer experience, and visionary management team. While we recognize that rising competition may create near-term headwinds for profitability, we are confident in Zomato’s ability to deliver profitable growth over the long term.

We added to our position in Microsoft Corporation ahead of what we expect to be an acceleration in growth of the company’s Azure cloud business.

In the cybersecurity software space, we exited CrowdStrike Holdings, Inc., whose stock rebounded to peak valuation levels after last summer’s July outage, and exited our position in Dynatrace, Inc., reinvesting those proceeds in CyberArk and Zscaler. We also exited smaller positions.

In the internet space, we exited our position in Meta Platforms, Inc., and reduced our position in Reddit, Inc., given the stocks’ strong performance and valuation, and reinvested those proceeds into a new position in Zomato.

In the semiconductor space, we exited Monolithic Power Systems, Inc. and Advanced Micro Devices, Inc. We shifted some of the capital from these sales into building our position size in automotive semiconductor challenger, indie Semiconductor, adding to our position in Broadcom, and initiating a position in AI networking leader, Arista Networks.

We want to thank you, our investors, for your trust and partnership. Our mission is to deliver long-term value by identifying exceptional companies that leverage technology and innovation across various stages of growth. By maintaining a broad perspective, we cast a wider net for investment opportunities, enabling greater portfolio differentiation and, over time, the potential for better Fund performance.

As we enter 2025, we continue to navigate what we see as an extraordinary period of technological advancement. AI is poised to be the defining force not only in technology but across all industries in the decade ahead. With this in mind, we strive to position the portfolio to capitalize on the transformative growth this era promises and remain confident in and committed to the strategy of the Fund: durable growth based on powerful, long-term, innovation-driven secular growth trends across the broader technology space.

Thank you for your support, and we wish you all the best in the year ahead.

Sincerely,