Baron Opportunity 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 3000 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 Opportunity Fund declined in the quarter. Real Estate and Financials holdings contributed to performance. Investments within Information Technology (IT), Consumer Discretionary, and Health Care detracted the most. CoStar Group, Inc., a provider of marketing and analytics to the real estate industry and the Fund’s sole sector holding, drove gains within Real Estate. Global payment network Visa Inc. led appreciation within Financials. IT had a difficult quarter, with widespread weakness led by NVIDIA Corporation and Broadcom, Inc., the top and third largest detractors, respectively. Second largest detractor Tesla, Inc. led depreciation within Consumer Discretionary. Next-generation DNA sequencing platform Illumina, Inc. led declines within the Health Care sector.

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.

While we are closely monitoring current market conditions, we remain confident in and committed to our strategy: durable growth based on powerful, long-term, innovation-driven secular growth trends. We continue to believe non-cyclical, durable, and resilient growth should be part of investors’ portfolios, and our strategy will deliver solid long-term returns for our shareholders.

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.
• Spotify Technology S.A. is a leading global digital music service offering on-demand audio streaming through paid premium subscriptions and an ad-supported model. Shares were up, once again attributable to another impressive beat in gross margins and a healthy increase in operating margins. Spotify has been on a path to structurally increase gross margins, aided by its high-margin artist promotions marketplace, growing contribution from podcasts, and structural investments in advertising. Users continued to grow at a double-digit pace despite price hikes. Spotify also continued to innovate on the product side, calling 2025 the "year of accelerated execution," with priorities in improving advertising, expanding into video, developing a Super Premium tier, and taking more market share. We view Spotify as a long-term winner in music streaming with potential to reach 1 billion-plus monthly active users.
• Inari Medical, Inc. offers catheter-based devices to remove clots from venous thromboembolism (VTE). VTE is the third most common vascular condition in the U.S. after heart attacks and strokes and can be fatal if left untreated. The market is still mostly greenfield, with patients receiving only ineffective drugs, and we believe there is room for multiple devices to win. Shares contributed to performance after Inari was acquired by Stryker in early January.

 

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.
• 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.
• Broadcom Inc. is a leading fabless semiconductor and enterprise software company, with approximately 60% of revenue generated from semiconductors and 40% from software. The company is strategically positioned at the intersection of high-performance AI compute and networking infrastructure while also demonstrating disciplined execution in software, particularly following its VMware acquisition. Shares declined largely due to investor concerns around the durability of AI cluster build outs by hyperscalers and AI labs, reflecting broader skepticism about the pace and sustainability of capex in AI infrastructure. We maintain conviction in the long-term thesis. Broadcom’s three mega-cap customers remain on track, with robust roadmaps in place, including hardware design, compiler development, and the broader software stack necessary for scalable AI cluster architecture. We expect Broadcom to capture a majority share of the estimated $60 to $90 billion market across these engagements by fiscal 2027.