Baron Durable Advantage Fund: Latest Insights and Commentary

The Review and Outlook for period ending June 30, 2024, is not yet available.

CONTRIBUTORS

• NVIDIA Corporation sells semiconductors, systems, and software for accelerated computing, gaming, and GenAI. NVIDIA’s stock rose on continued strong demand for its GPUs at the epicenter of the generative AI revolution. NVIDIA continued to report unprecedented rapid growth at scale, with quarterly revenues of $26 billion growing 262% year-over-year, datacenter segment revenues of $22.6 billion up 427% year-on-year, and operating margins of 69.3%. NVIDIA’s growth is even more impressive as it is nearing a new product cycle with the Blackwell chip going into production in Q3 and speaks to the urgency of demand for GPUs as customers are not willing to wait for the next generation architecture despite its improved performance-to-cost ratio. Management has commented as well that Blackwell would be supply constrained well into 2025. While the stock's strong performance has pulled forward some of the longer-term upside (which we manage through position sizing), it is still early in the accelerated computing platform shift and the adoption of GenAI across industries.
• Alphabet Inc. is the parent company of Google, the world’s largest search and online advertising company. Shares of Alphabet were up this quarter, reflecting solid performance as well as continued product innovation in generative AI, including a potential deal to provide Google's foundational AI model Gemini to Apple's iPhone users. We continue to closely monitor the quickly changing innovations relating to generative AI and the potential implications on consumer behavior around Search, including the shift to chatbot form. On the positive side for Alphabet, we believe AI innovation could lead to stronger products in adjacent fields (e.g., travel) and a continued healthy cloud infrastructure business in Google Cloud Platform. The company benefits from a fundamentally strong business model and massive scale, particularly in the core assets of Search, YouTube, and the Google ad network, as well as top talent in its engineering division.
• Broadcom Inc. is a global technology leader with a broad range of semiconductor and infrastructure software solutions. Its semiconductor solutions focus on digital, mixed signal, and analog products across a variety of end markets, while its software products help customers plan, develop, automate, manage, and secure applications. The stock rose on strong earnings results on the back of two key growth drivers, AI semiconductors and the VMWare acquisition. The company once again increased its outlook for AI-related revenue, now expecting $11 billion or more this year, up from a prior estimated $10 billion. VMWare remains on track for rapid sequential growth while reducing operating expenses, driving faster-than-expected margin expansion and accretion. We believe Broadcom is a key beneficiary of AI infrastructure investment, with its industry-leading switching silicon and other chips and its custom silicon business supporting hyperscale customers with their own custom accelerators. We also believe the VMWare integration will drive more accretion than current consensus forecasts.

 

DETRACTORS

• CoStar Group, Inc. is a provider of marketing and data analytics services to the real estate industry. Shares detracted from performance in the quarter along with the broader software sector. Most software companies experienced a slowdown in new sales activity in early 2024, leading to guidance reductions and multiple compression. We believe CoStar shares were also impacted by concerns that the company’s second quarter financial results will show a deceleration in net new sales of its residential product following outstanding first quarter performance. We remain encouraged by traction in CoStar’s residential offering although recognize that progress may not be linear. CoStar began to monetize its new Homes.com platform in February. We believe early momentum can be amplified by the recent NAR class action settlement, which has the potential to disrupt the residential brokerage industry and enhance the return on investment for brokers advertising on Homes.com.
• Shares of MSCI Inc., a leading provider of investment decision support tools, detracted from performance. The company reported mixed Q1 2024 earnings as its end market remained choppy, leading to elevated client cancelations and a more muted new sales environment. Despite this near-term macro uncertainty, we retain long-term conviction as MSCI owns strong, "all weather" franchises and remains well positioned to benefit from numerous secular tailwinds in the investment community.
• Accenture plc provides consulting and technology services to corporate clients around the world. Shares fell due to slower-than-expected revenue growth, which caused management to trim the earnings outlook for the fiscal year. Client demand trends remained weak but stable given macroeconomic uncertainty, moderation in IT spending following a pandemic-related surge, and budget reallocations toward cloud and AI infrastructure away from services and software. We expect these cyclical headwinds to abate, leading to faster growth in a large global market for IT services.