Review and Outlook

as of 03/31/23

The U.S. stock market posted solid gains during the first quarter, with the Russell 2000 Growth Index returning 6.07%. On the positive side, Chinese COVID lockdowns, supply chain disruptions, input cost inflation, and labor cost inflation and availability have all improved to the point where we believe these challenges are in the rear-view mirror. Importantly, we also believe the market is underestimating the potential upside from better margins as we lap two years of extremely challenging inflationary conditions. On the negative side, we believe the failures of Silicon Valley Bank and Signature Bank and the related fallout will lead to higher borrowing costs, stricter lending standards, and contracting credit conditions. These tighter lending conditions, in turn, will likely dampen demand growth. In our view, the net result will be that top line “beat and raises” will be tougher to come by in 2023 but will be offset by consensus-beating bottom line results given margin tailwinds.

Baron Discovery Fund increased in the quarter. Information Technology (IT), Industrials, and Consumer Discretionary holdings contributed the most to performance. Only Health Care investments detracted. Third largest contributor indie Semiconductor, Inc. led gains within IT. Appreciation within the Industrials sector was led by second largest contributor Axon Enterprise, Inc. Floor & Decor Holdings, Inc. led advances within Consumer Discretionary. Shares of this specialty retailer of hard-surface flooring rose on 2023 guidance that beat consensus. Despite a weaker housing market, Floor & Decor expects revenue to grow roughly 10% this year as temporary softness in existing stores is more than offset by new unit openings. Health Care lagged the broader market as investors sold out of defensive sectors that had done well in 2022. Weakness within the sector was led by top detractor Silk Road Medical, Inc.

The stock market has gotten off to a solid start in 2023. That being said, we expect there will be fits and starts to the recovery. We always like to say market bottoms are processes, not points. We think it will take time for the market to digest the various crosscurrents in today’s economy. It is almost impossible to time the bottom, so we believe the best strategy is to stay the course with our investment process and our competitively advantaged, fast-growing companies. By doing so, we expect to be better positioned to outperform when the inevitable economic recovery begins.

Top Contributors/Detractors to Performance

as of 03/31/23


  • Revance Therapeutics, Inc., an aesthetics-oriented biotechnology company, contributed to performance in the quarter. Revance, which sells facial injectables, saw robust revenue growth in the fourth quarter after the FDA approved Daxxify, the company’s longer-acting competitor to Botox that lasts about six months versus Botox’s three to four months. Daxxify’s soft launch has been promising, with $11 million in sales in the first month of the early preview program. We believe Revance will benefit as it broadens the launch to additional injectors throughout the year. The company’s RHA facial filler portfolio also beat Street expectations in 2022 and has yet to decline amid macro headwinds. Looking ahead, we think Daxxify’s longer-lasting result is a key selling point for consumers, and we expect to see meaningful uptake of the product in late 2023 and beyond. In our view, Daxxify and the already-launched RHA fillers should capture significant share in the fast-growing $4 billion facial injectables market, with the potential to support double Revance’s current valuation.
  • Shares of Axon Enterprise, Inc., a public safety-focused technology company, rose during the quarter following a robust earnings report and a favorable long-term outlook that raised revenue guidance and beat investor expectations. Notable growth in Axon’s higher-margin Cloud business and Sensors segment reflects strong demand for the company's digital evidence management, productivity, and real-time operations platforms, as well as Axon Fleet in-car cameras. The company is also targeting reduced costs, share dilution, and enhanced free cash flow conversion in the coming years, which offers dramatic upside potential. With line of sight to more than 20% CAGR, an improving margin profile with the growth of software solutions, and a management team that has demonstrated an ability to innovate quickly, sell to customers, and manage costs effectively, Axon has solidified itself as a best-in-class company and a compelling investment in the public safety space.
  • indie Semiconductor, Inc., is a fabless designer, developer, and marketer of automotive semiconductors for advanced driver assistance systems (ADAS) and connected car, user experience, and electrification applications. Shares rose during the quarter after the company announced the acquisition of GEO Semiconductor and met/exceeded revenue and gross margin guidance for the seventh straight quarter since coming public. After raising capital in late 2022 to fund M&A activity, in early 2023, indie announced its buyout of GEO Semiconductor for up to $270 million, including potential earnouts, to round out its ADAS sensor portfolio with a leader in camera processing technology. GEO is a highly synergistic acquisition that accelerates indie’s growth and margin trajectory. The automotive semiconductor vertical remains attractive; and we believe indie will continue to deliver on its targeted model of profitability in the second half of 2023 and 60% gross margin and 30% operating margin by 2025, while rapidly increasing revenue, as it fulfills its $4.2 billion and growing strategic backlog.


  • Silk Road Medical, Inc. sells medical devices used in minimally invasive transcarotid artery revascularization (TCAR) procedures. The stock declined after doctors petitioned Medicare to broaden reimbursement for alternative minimally invasive transfemoral carotid stenting (TF-CAS) interventions. We retain conviction, as TCAR is less invasive, has an easier recovery, and causes fewer periprocedural strokes than other options, including TF-CAS and carotid endarterectomy surgery. Following last summer's FDA approval of Silk Road devices in the treatment of standard surgical risk carotid stenosis patients, the company saw rising numbers of eligible patients, accelerated use of its products, reduced reimbursement uncertainty, and further legitimization of TCAR in the eyes of more conservative surgeons. Although Medicare is reviewing the reimbursement policy for TF-CAS procedures, we think TCAR is fundamentally safer and more scalable than alternatives. TCAR currently accounts for nearly 13% of carotid stenosis interventions, and we believe it will become the standard of care for treating carotid artery disease over the longer term.
  • GitLab Inc. provides the only DevOps platform that addresses all stages of the software application lifecycle. Despite reporting decent results with revenue growth of 58% and operating losses that were less than Street forecasts, the company issued below-consensus 2023 revenue growth guidance. Technology industry layoffs and tighter IT/ developer budgets resulted in lower net revenue retention rates in GitLab's Premium Tier, as some existing customers cut back on paid licenses to account for reduced hiring, while others anticipate a lower rate of developer headcount growth in 2023. Management is assuming the trend will continue through the remainder of 2023. We see upside to the guidance as 1) customers continued to upgrade to GitLab's higher-priced Ultimate Tier to add security and compliance features; 2) new customer sign-up growth remained healthy; and 3) GitLab is implementing a 25% to 50% price increase on its Premium Tier that should drive growth toward the end of 2023 and into 2024. The price increases will also help GitLab achieve profitability sooner than it initially projected.
  • Axonics, Inc. offers a novel implantable sacral neuromodulation device for the treatment of urinary and bowel dysfunction. Through an acquisition, it also offers Bulkamid, a unique injectable product to treat stress urinary incontinence (SUI) in women. Shares declined somewhat during the quarter. There wasn’t any particular negative catalyst. We retain conviction.that Axonics' product is unique. It believes its current market of $650 to $700 million, representing 45,000 implants, is less than 1% penetrated, as the addressable market is close to seven million patients. Axonics thinks the market can double in three to five years. Bulkamid has a market of $125 million, representing 125,000 procedures. With 29 million women affected by SUI, we believe this market represents a significant growth opportunity as well.

Quarterly Attribution Analysis (Institutional Shares)

as of 03/31/23

When reviewing performance attribution on our portfolio, please be aware that we construct the portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio if it meets our rigorous investment criteria. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to achieve a target sector allocation or to approximate an index. Our exposure to any given sector is purely a result of our stock selection process.

as of 03/31/23

Baron Discovery Fund (Institutional Shares) was up 11.20% in the first quarter, outperforming the Russell 2000 Growth Index by 513 basis points due to stock selection and, to a lesser extent, differences in sector/sub-industry weights. Style biases also aided performance, specifically the Fund’s overexposure to stocks with higher betas and valuations given these factors rebounded after being out of favor last year.

Information Technology investments accounted for about 40% of the outperformance in the period, driven by significant gains from indie Semiconductor, Inc., Navitas Semiconductor Corporation, and a few other semiconductor-related holdings. Shares of indie, a provider of automotive semiconductors and software solutions, rose sharply after the company announced the acquisition of GEO Semiconductor and met/exceeded revenue and gross margin guidance for a seventh straight quarter since coming public. Navitas is a leader in gallium nitride power semiconductors and a smaller player in silicon carbide power semiconductors. The company’s shares more than doubled after management reiterated its robust revenue outlook for fiscal year 2023 and investors appeared optimistic about the recovery in its key mobile charging end market concentrated in China. Apart from stock selection, the Fund benefited from higher exposure to strong performing semiconductor/semiconductor equipment and software stocks, which were up double digits in the index.

Stock-specific strength in Industrials, Consumer Discretionary, and Financials together with lack of exposure to the lagging Energy sector also contributed to relative gains in the period. Performance in Industrials was bolstered by Axon Enterprise, Inc., a public safety-focused technology company. Axon’s shares moved higher in response to a robust earnings report and favorable long-term outlook that beat investor expectations. The company reported significant growth in its higher-margin Cloud business and Sensors segment, reflecting strong demand for its digital evidence management, productivity, and real-time operations platforms, as well as Axon Fleet in-car cameras. Several other holdings also performed well in the sector, led by digital automotive marketplace ACV Auctions Inc., wholesale landscape supplies distributor SiteOne Landscape Supply, Inc., and defense contractors Kratos Defense & Security Solutions, Inc. and Mercury Systems, Inc. Specialty flooring retailer Floor & Decor Holdings, Inc., regional casino operator Boyd Gaming Corporation, and premium performance sports brand On Holding AG were responsible for most of the relative gains in the Consumer Discretionary sector. Floor & Decor’s shares outperformed after management provided better-than-feared initial guidance for 2023. Despite softness in the housing market, Floor & Decor expects revenue to grow roughly 10% this year as a temporary slowdown in existing stores should be more than offset by continued new unit openings as the company's direct sourcing model, low cost leadership, and wide selection help it take share from big box retailers and independent specialty shops. Boyd’s stock increased as the company continued to generate strong earnings and cash flow despite concerns about a slowdown in the economy, while On’s shares were lifted by excellent quarterly results and annual guidance. On's strong performance is due to increasing demand for the company's innovative footwear products coupled with enhanced distribution capabilities domestically and abroad. Favorable stock selection in Financials was driven by specialty insurer Kinsale Capital Group, Inc., whose solid quarterly financial results featured an increase in gross written premiums of 45% and EPS growth of 47%. Market conditions remain favorable with rising premium rates and more business shifting from the standard lines market to the excess and surplus lines market where Kinsale operates. The company is also capitalizing on disruption in the property market where rates are rising rapidly after years of industry losses and a reduction in reinsurance capacity.

The only material drag on performance was stock selection in Health Care, as performance was hindered by double-digit declines from several holdings, including medical device companies Silk Road Medical, Inc. and Axonics, Inc. Shares of Silk Road, which sells medical devices used in minimally invasive carotid artery procedures, declined after a group of doctors petitioned Medicare to broaden reimbursement for alternative Transfemoral Carotid Artery Stenting (TF-CAS) procedures. Medicare is reviewing the reimbursement policy, but we think Silk Road’s Transcarotid Artery Revascularization procedure is a safer, easier-to-perform, and more scalable procedure than TF-CAS. Axonics offers a novel implantable sacral neuromodulation device for the treatment of urinary and bowel dysfunction. Through an acquisition, the company also offers Bulkamid, a unique injectable product to treat stress urinary incontinence in women. Axonics shares declined somewhat during the quarter, but we can’t pinpoint any particular negative catalyst. We retain conviction given Axonics' unique product and the opportunity presented by the company’s vast addressable market, which remains minimally penetrated.

Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectuses contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99BARON or visiting Please read them carefully before investing.

The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor's shares, when redeemed, may be worth more or less than their original cost. The Fund’s transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted.

Risks:All investments are subject to risk and may lose value.

The discussion of market trends is not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed on this page reflect those of the respective writer. Some of our comments are based on management expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from our expectations. Our views are a reflection of our best judgment at the time and are subject to change at any time based on market and other conditions and Baron has no obligation to update them

Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.

The index performance is not fund performance; one cannot invest directly into an index.