Baron Fifth Avenue Growth Fund: Latest Insights and Commentary

U.S. stocks struggled during the first quarter of 2025 as the shock of Trump’s tariff war erased any optimism that the U.S. stock market or economy would continue to flourish under the new administration, replaced by heightened concerns of a possible recession. The mass layoffs of federal workers added to the confusion. The Magnificent Seven, which had led the market on AI-driven enthusiasm, were even harder hit by tariff uncertainties, as their relatively high valuations made them more exposed to a slowdown. In addition, the January launch of Chinese AI app DeepSeek as a less expensive alternative to U.S.-based AI models had investors questioning whether the massive investments in AI would ultimately produce the expected outsized returns. The Russell 1000 Growth Index declined 10.0%.

GDP growth is widely predicted to slow during 2025, reflecting weakening consumer demand and more cautious corporate spending. Consumer confidence has plummeted. The March 2025 inflation figure came in above the U.S. Federal Reserve’s target of 2%, as measured by the Consumer Price Index. The Fed has taken a wait-and-see approach as the effects of heightened U.S. policy uncertainty on growth, inflation, and employment play out. It left interest rates unchanged in its first meeting of the year.

Against this challenging backdrop, Baron Fifth Avenue Growth Fund declined in the first quarter. No sector contributed. Investments within Information Technology (IT), Communication Services, and Consumer Discretionary detracted the most. Weakness within IT was led by top detractor NVIDIA Corporation. All three Communication Services holdings lost ground, including second largest detractor The Trade Desk. Third largest detractor Tesla, Inc. drove depreciation within Consumer Discretionary.

The second quarter may bring with it as much doubt and volatility as the first quarter, given continued elevated uncertainty around tariffs. After reaching a record high of more than $3.3 trillion in corporate profits in the fourth quarter of 2024, U.S. companies are scrambling to estimate the potential impact of the tariff war. As first quarter earnings season approaches, many observers expect businesses to offer weaker earnings guidance for the rest of the year or withdraw guidance completely.

We are closely monitoring current market conditions while staying focused on company fundamentals -- well-managed businesses with durable competitive advantages and compelling growth prospects at attractive prices -- as we believe this is the best way to generate alpha over the long term, although there are no guarantees.

CONTRIBUTORS

• X.AI Holdings Corp. is developing an AI model "to understand the true nature of the universe." In a short period since its inception, xAI launched its AI model and product, including the third version of the model, Grok 3, which demonstrated top scores in evaluation tests, ahead of other industry-leading AI models. The company also opened the Colossus data center, operating more than 100,000 Graphical Processing Units and considered at the time to be the largest coherent training center in the world. Grok 3 was the first model trained on xAI's Colossus, leveraging more than 10 times the compute used to train Grok 2. Most recently, xAI acquired X, formerly Twitter. The acquisition is expected to improve alignment of corporate objectives, enhance resource allocation, and integrate data, compute, and products. In addition, it provides xAI access to X’s vast, real-time, multimodal data generated by 600 million users worldwide. We value the stock based on recent share transactions, including the recently announced merger.
• MercadoLibre, Inc., the leading e-commerce marketplace across Latin America, contributed to performance. The company reported solid quarterly results, with better-than-expected revenues and a significant beat in earnings before interest and taxes, as margins rebounded sharply, reversing the decline seen in the previous quarter and alleviating concerns around investment-driven impacts to near-term profitability. MercadoLibre continues to post strong growth in volume indicators, which gives us confidence in its ability to capture a leading share of the structural growth opportunity for e-commerce and fintech in Latin America. We remain shareholders.
• Veeva Systems Inc., a cloud platform focused on the life sciences industry, contributed to performance. Despite growing pharmaceutical-related regulatory concerns, quarterly results and full-year guidance both exceeded expectations. Platform adoption remained robust, highlighted by one of the largest subscription contracts in Veeva's history, and positive adoption trends are visible across all key product verticals, including clinical, safety, quality, and data. Management expressed confidence in the transition of the customer relationship management (CRM) solution from a Salesforce backend to an in-house system. Although a top client opted for a competitor, Veeva anticipates most customers will adopt its new CRM solution, which targets previously untapped service and marketing segments and will leverage AI-based offerings. Data cloud, representing a large market opportunity, and new AI solutions showing growing traction with early adopters, can serve as important support to future growth.

 

DETRACTORS

• NVIDIA Corporation is a fabless semiconductor leader specializing in compute and networking platforms for accelerated computing. Its dominant position in AI infrastructure, with a comprehensive portfolio that spans GPUs, systems, software, and high-performance networking, has driven significant stock appreciation in an era of exponential AI demand. Despite strong quarterly financial results, shares fell on investor concerns around the durability of compute infrastructure spending by hyperscalers and the leading AI labs, particularly in light of uncertain return on invested capital for frontier model development. We remain positive on NVIDIA's long-term trajectory. We believe scaling laws in AI will hold, enabling linear improvements in compute to drive super-linear gains in model performance and utility. As value creation increasingly accrues to model developers, their incentive to invest in advanced infrastructure should persist, anchoring NVIDIA’s central role in the AI value chain.
• The Trade Desk is the leading internet advertising demand-side platform, enabling agencies to efficiently purchase digital advertising across PC, mobile, and online video channels. Shares fell on an earnings miss for the first time in 33 quarters. Since the most recent earnings report, we have done substantial research to test our investment thesis. We believe the miss was due largely to a reorganization in December and delays in its Kokai platform rollout, both of which we believe have since improved. While we monitor the competitive landscape as Amazon enters the market more meaningfully, we believe The Trade Desk still represents the best option for biddable Connected TV (CTV) inventory. It gained share against the incumbent Google in the last five years, even when Google charged low/no fees, and major companies like Netflix, Disney, and Spotify have opened their ad inventory to The Trade Desk. Its market remains large and underpenetrated, as the shift to CTV advertising is still in early stages. We believe The Trade Desk can grow its top line by high-teens to 20% year-over-year for years to come.
• Tesla, Inc. manufactures electric vehicles (EVs), solar products, and energy storage solutions alongside the development of advanced real-world AI technologies. Shares fell due to declining analyst expectations for auto delivery volume and margins in 2025 as a result of 1) a refresh of the Model Y, its highest volume vehicle and the world's best selling car in 2024; 2) Elon Musk’s controversial role in the Trump administration; and 3) regulatory changes that could pose potential operational challenges. Despite these headwinds, we remain confident in Tesla’s long-term growth, underpinned by secular trends in EVs and energy storage adoption, a compelling product line, its leading cost structure, and cutting-edge technology. A Model Y refresh alongside the debut of new mass-market models should boost demand. Over time, we expect the political pressure to fade, while Tesla’s AI ambitions—a robotaxi service launching this year and a fast-growing humanoid program—hold the promise of transforming its growth story.