Baron Fifth Avenue Growth Fund

Contributors

• NVIDIA Corporation sells semiconductors, systems, and software for accelerated computing, gaming, and generative AI (GenAI). NVIDIA's stock rose in the first quarter, driven by continued strong demand for its GPUs that stand at the epicenter of the GenAI revolution. NVIDIA closed 2023 with unprecedented revenue growth at massive scale, with a fourth-quarter revenue run rate just shy of $90 billion, growing over 3.5 times year-on-year with operating margins of 67%. In addition to GenAI-driven demand, NVIDIA is benefiting from the transition to accelerated computing. NVIDIA continues to improve the performance of its chips and systems while removing hurdles for adoption through software innovation, such as the recently announced NVIDIA Inference Microservices, which make it easier for companies to adopt GenAI at scale.
• Shares of Meta Platforms, Inc., the world’s largest social network, were up in the quarter due to robust topline growth and first-quarter guidance indicating roughly 29% year-over-year revenue growth. Our industry checks have validated advertiser adoption and satisfaction, with particular improvements in monetizing Instagram Reels and click- to-message ads. Meta continues to innovate in generative AI (GenAI), with a leading research lab and the best open-source models to date; we are beginning to see Meta's core apps incorporate GenAI in the user experience. Core app engagement remains healthy, with video daily watch time growing 25% year-over-year and the total number of monthly active users rising to 3.98 billion in the fourth quarter. We believe Meta will utilize its leadership in mobile advertising, massive user base, innovative culture, leading GenAI research and potential distribution, and technological scale to perform, with further monetization opportunities ahead.
• Amazon.com, Inc. is the world’s largest retailer and cloud services provider. Shares increased on quarterly results that exceeded consensus expectations, particularly with a large beat in overall operating profit. We believe Amazon is well positioned in the short to medium term to meaningfully improve core North American retail profitability to above pre-pandemic levels, benefiting from its new regionalized fulfillment network and its fast-growing, margin-accretive advertising business. Amazon has substantially more runway in eCommerce, where it has less than 15% penetration in its total addressable market. We also believe Amazon's cloud service, AWS, has many years ahead of meaningful growth, with customer cloud optimizations attenuating, although we continue to monitor its positioning in generative AI (GenAI). It remains the clear leader in the vast and growing cloud infrastructure market, with large opportunities in application software, including enabling GenAI workloads.

Detractors

• Shares of IT services provider Endava plc fell after management cut guidance for the fiscal year ending June 30, 2024. Growth has slowed over the last year as business customers pulled back on discretionary IT spending due to macroeconomic uncertainty. Last fall, management was seeing early signs of a recovery, but new projects have been taking longer to materialize as customers delay spending decisions. Higher expenses due to increased staffing to meet anticipated demand weighed on margins as well. Management acknowledged that it misread the market and is taking steps to right-size the cost structure to improve margins. We remain invested because we expect these near-term headwinds to abate over time, leading to better growth as clients embrace digital transformation.
• Tesla, Inc. designs, manufactures, and sells electric vehicles, related software and components, and solar and energy storage products. Shares fell as the core automotive segment remained under pressure due to a complex macroeconomic environment, factory shutdowns, growing competitive risks in China, and Tesla’s price reductions throughout 2023. During the first quarter of 2024, production was negatively impacted by Red Sea maritime supply chain interferences, sabotage at a Tesla factory power supply in Berlin, and the launch of the refreshed Model 3. We remain shareholders. Tesla has started delivery of its highly anticipated Cybertruck pickup, which features new technologies within the car and its manufacturing lines. Tesla also launched version 12 of its Full Self Driving product, which features material improvements and should enhance investor confidence in Tesla's unique software and hardware capabilities. Lastly, we expect energy storage sales to continue to grow over the coming years.
• Shares of Rivian Automotive, Inc., a U.S.-based electric vehicle manufacturer, detracted from performance. Despite substantial improvements in production and delivery volumes in 2023 as well as improved unit economics, Rivian's business remains constrained by its limited scale, negative gross margins, and elevated cash outflows. Additionally, Rivian expects to temporarily shut down its production facilities for upgrades, impeding anticipated production growth in 2024. Compounding these challenges is the potential for demand constraints, which may not keep pace with production. Nevertheless, the recent unveiling of Rivian's mass-market products, the R2 and R3, garnered enthusiastic responses, evidenced by over 68,000 pre-orders within the first 20 hours post-launch. In a strategic move, management opted to produce the R2 in Rivian's existing facility, deferring the construction of a new factory. This decision should help reduce mid-term capital expenditure obligations while ensuring higher utilization of current facilities as the R2 ramps production in 2025.