Baron Technology 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.
• 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.
• Microsoft Corporation is a software company traditionally known for its Windows and Office products. Over the last eight years, it has built a $100 billion-plus cloud business, including Office 365, CRM product Dynamics 365, and infrastructure-as-a-service product Azure. Shares increased following robust quarterly results, featuring an approximately 2% beat on the top line, upside across all three operating segments, and strong margin performance, despite ramping long-tailed investments in AI initiatives. During the fourth quarter, Azure revenue growth accelerated by one point to 30% year-over-year, fueled by increasing Azure AI revenue, now contributing 6% to the segment, up from 3% previously. Management emphasized the significance of inferencing over training large language models, marking a bullish trend, in our view, as we think inferencing is a more recurring, higher-quality revenue stream, driving fast growth with long-term durability. Given the company’s revenue growth in the second fiscal quarter and emerging AI monetization avenues like Azure AI services and M365 Copilot, we remain confident in Microsoft as the leader within the software space.

Detractors

• 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.
• indie Semiconductor, Inc. is a fabless designer, developer, and marketer of automotive semiconductors for advanced driver assistance systems and connected car, user experience, and electrification applications. Shares fell during the quarter after indie guided to 2024 revenue growth that missed Street expectations as a result of customers absorbing excess inventory. While indie conservatively expects to maintain a healthy 25%-plus year-over-year growth rate, well above industry and peer benchmarks, and management expressed confidence in a robust second half given more than 20 new projects, investors seemed concerned about prolonged inventory digestion into 2024. We think indie remains well positioned for growth over the medium and long term, especially with its $6.3 billion design win backlog and significant program ramps anticipated in 2025, including a prestigious radar-related rollout – the company’s largest program to date. We believe indie can continue to significantly outpace the broader industry and reach nearly $1 billion in revenue by 2028 with premium margins, supported by its contracted visibility.