Baron Technology 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 MSCI ACWI Information Technology Index declined 11.6%.

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 Technology Fund declined in the quarter. Holdings within the entertainment, real estate management & development, and personal care products sub-industries contributed. Investments within the semiconductors & semiconductor equipment, software, and broadline retail sub-industries detracted the most. Music streaming service Spotify Technology, S.A. drove advances within entertainment, while CoStar Group, Inc., a provider of marketing and analytics to the real estate industry, drove gains within real estate management & development. Personal care products was a modest contributor on a share price gain in ODDITY Tech Ltd., a company building digital-first brands in beauty and wellness. Weakness within semiconductors & semiconductor equipment was led by Broadcom, Inc. and NVIDIA Corporation, the top and second largest detractors, respectively. Depreciation within software was led by mega-cap software company Microsoft Corporation. Third largest detractor Amazon.com, Inc. drove declines within broadline retail.

The second quarter may bring with it as much doubt and volatility as the first, 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 across the broader technology space.

CONTRIBUTORS

• 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.
• CoStar Group, Inc. is the leading provider of information and marketing services to the commercial and residential real estate industry. Shares rose on an increase in the productivity of CoStar's sales force and signs of a start to the recovery of the commercial real estate market. Mixed results around net new sales following CoStar's significant investment in residential product Homes.com had pressured shares. We remain encouraged by growth in both traffic and brand awareness for the new product and are optimistic that the build out of a dedicated sales team as well as the potential benefits of changes in Multiple Listing Service practices will improve residential sales momentum. We also believe growth in CoStar’s non-residential business is poised to accelerate. Sales productivity has begun to improve as salespeople return to exclusively selling their core product, and we expect this to be amplified as the sales force expands by 20% or more in 2025. We believe the value of CoStar’s core non-residential business exceeds the share price, implying that investors ascribe negative value to the residential opportunity.
• GDS Holdings Limited is a leading data center operator in Tier 1 cities in China as well as a growing Pan-Asia data center platform. Shares contributed on improving demand in China, the continued ramp of its now de-consolidated international business (renamed “DayOne”) and monetization of select assets at a premium valuation via a REIT transaction anchored by one of the largest life insurance companies in China. We remain investors given undemanding valuation levels, accelerating growth, progress toward debt reduction, and imbedded value in its international business via private capital raises backed by highly regarded investors at compelling valuations. GDS benefits from durable secular tailwinds in cloud adoption, increasing demand from AI deployments, growth visibility, and its status as a provider of choice to leading technology companies in China and the U.S.

 

DETRACTORS

• 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.
• 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.
• Amazon.com, Inc. is the world’s largest retailer and cloud services provider. Shares were down this quarter following higher-than-expected 2025 capital expenditure guidance of $105 billion driven by AI. Shares also declined due to a broader technology selloff due to uncertainty about the timing and return on investment in AI as well as general macroeconomic concerns. We remain investors. Profitability across core North American retail, Amazon Web Services (AWS), and international retail continued to grow, with improved prioritization in cost discipline and optimization. It was also another solid quarter of AWS results and improving checks around generative AI use cases. While we are monitoring progress across the cloud hyperscalers, we believe AWS will ultimately be competitive in generative AI, given its scale and technical infrastructure advantages. Longer term, Amazon has more room to grow in e-commerce, where it has less than 15% penetration. Amazon also remains the clear leader in the vast and growing cloud infrastructure market, with large opportunities in application software.