Review and Outlook

as of 12/31/23

The Review and Outlook for period ending December 31, 2023, is not yet available.

Top Contributors/Detractors to Performance

as of 12/31/23

Contributors

  • 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 (including Azure AI services). Shares increased after posting strong quarterly results, with a material top line beat, upside across all three operating segments, and strong margin growth, despite ramping long tail investments behind AI. We remain confident that Microsoft is one of the best positioned companies in software with its vertically integrated software stack and broad sales distribution. We believe Microsoft will continue taking share across its business, driving durable, long-term, double-digit growth and best-in-class profitability.
  • Amazon.com, Inc. is the world’s largest retailer and cloud services provider. Shares of Amazon were up in the quarter. Reported results were better than consensus, with a significant beat in North American operating profit. We believe the AWS cloud division has many years ahead of growth, with recent customer optimizations attenuating. We also 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 growing margin-accretive advertising business. Longer term, Amazon has substantially more room to grow in e-commerce, where it has less than 15% penetration of the total addressable market. Amazon also remains the clear leader in the vast and growing cloud infrastructure market, with large opportunities in application software, including enabling generative AI workloads.
  • Advanced Micro Devices, Inc. (AMD) is a global fabless semiconductor company focusing on high performance computing technology, software, and products that enable differentiated solutions for customers. Shares rose during the quarter as AMD launched its MI300 GPU electronic circuit and provided initial revenue guidance and commentary supporting strong revenue in 2024. While we expect AMD's Gaming and Embedded segments to be in correction in 2024, we anticipate stable market share in its Client segment following an inventory correction. AMD also continues taking share from Intel in server CPUs. Longer term, we look to the Data Center segment to be the key growth driver for AMD given its strong GPU, CPU, and adaptive compute product portfolio based on proprietary designs and advanced packaging and the growing demand for traditional and AI-related compute power. 

Detractors

  • Tesla, Inc. designs, manufactures, and sells electric vehicles, related software and components, and solar and energy storage products. The stock detracted as the core automotive segment remained under pressure due to a complex macroeconomic environment, higher interest rates, factory shutdowns, and Tesla’s price reductions throughout the year, presenting pressure on the near-term growth and margin profile. Nonetheless, Tesla continued to generate sufficient gross profit to support a robust product development plan that can propel the automotive segment higher over time. Tesla also started to deliver its highly anticipated Cybertruck, its first pickup truck with tremendous amount of consumer interest and a slew of new technologies within the car and its manufacturing lines. The refreshed Model 3 also seems to be generating strong demand while improving unit-level economics. Lastly, while early, investors now expect Tesla to benefit from its investment in AI through development of autonomous driving technology Dojo (an AI training compute), autobidder (an automated energy trading platform), and humanoid (a human-like robot).
  • Shares of Rivian Automotive, Inc., a U.S.-based electric vehicle manufacturer, detracted. Rivian started production during one of the most challenging periods in the automotive supply chain in decades, especially in relation to semiconductors. Consequently, vehicle production scaled at a slower pace than scheduled, leading to unfavorable unit-level economics and significant cash outflows. Despite substantial improvements in production and delivery volumes in 2023, as well as improved unit economics, the operation is still subscale, with elevated cash outflows. Additionally, while Rivian's current manufacturing facility in Normal, Illinois, is scaling production, the company is poised to construct another multi-billion-dollar facility in Georgia in the near future, implying large funding needs to support its early stage of operations. Lastly, despite recently announcing a trial with AT&T to deploy Rivian vehicles in its fleet, Amazon's purchasing of Rivian's electric vans has been slower than initially scheduled. We recognize Rivian's potential to become an important player in the electric vehicle sector but appreciate the tremendous challenges ahead.
  • Shares of Ceridian HCM Holding Inc., a leader in payroll and HCM software, detracted from performance during the quarter. We attribute the relative decline to investors erroneously extrapolating growth issues at competitor Paycom onto the broader industry. We believe Paycom’s issues are completely idiosyncratic. We also believe investors are concerned that slowing employment growth will reduce Ceridian's growth rate in the near term. While Ceridian has some exposure to employment levels, it is benefiting from secular trends around the modernization of HCM software and growing adoption of software-as-a-service. We believe Ceridian can continue to grow above 20%, helped by share gains, a move up-market, early international traction, and increasing success in cross-selling to existing customers.

Quarterly Attribution Analysis (Institutional Shares)

as of 12/31/23

Baron Technology Fund (Institutional Shares) rallied 18.95% in the fourth quarter, modestly outperforming the MSCI ACWI Information Technology Index by 139 basis points due to stock selection.

Most of the relative gains came from favorable stock selection in certain Information Technology (IT)-related industries, namely software, semiconductors & semiconductor equipment, and IT services. The Fund also benefited from its significant underweight position in Apple Inc., whose 13% gain in the period was not enough to keep pace with the broader IT sector. Strength in software was widespread, led by considerable gains from cloud-architected SaaS cybersecurity vendor CrowdStrike Holdings, Inc. and software development and IT operations platform GitLab Inc. CrowdStrike was a top contributor after reporting strong quarterly results, with the company beating every key performance indicator, including an acceleration in net new annual recurring revenue (ARR) and record profitability. The company continued to report elongated deal cycles as more businesses look to consolidate vendors, noting that its win rates remained strong across legacy and next-gen vendors. CrowdStrike also highlighted an acceleration in revenue in two of its top three add-on products -- Cloud Security and Identity -- and noted that its LogScale/SIEM product had surpassed $100 million in ARR. Similarly, GitLab delivered excellent quarterly results driven by improving win rates in enterprise deals, solid seat growth, and higher average selling prices. In recent years, GitLab has delivered more than 400 feature enhancements to its platform, enabling its customers to consolidate more software development steps into GitLab, lowering total IT costs and achieving faster software delivery times. As a result, GitLab has realized higher average revenue per user through a combination of price increases and upgrades to its Ultimate Tier.

Several semiconductors & semiconductor equipment holdings performed well in the period, led by Advanced Micro Devices, Inc. (AMD) and BE Semiconductor Industries N.V. AMD is a global fabless semiconductor company focusing on high performance computing technology, software, and products that enable differentiated solutions for customers. Shares rose during the quarter as AMD launched its MI300 GPU electronic circuit and provided initial revenue guidance and commentary supporting strong revenue in 2024. While we expect AMD's Gaming and Embedded segments to be in correction in 2024, we anticipate stable market share in its Client segment following an inventory correction. AMD also continues taking share from Intel in server CPUs. BE Semiconductor is a leading supplier of semiconductor assembly equipment for the global semiconductor and electronics industries offering high levels of accuracy, productivity, and reliability at a low cost of ownership. The company’s stock was lifted by expectations for a cyclical recovery heading into 2024 and growing demand for chiplets, an innovative, modular approach to semiconductor design and manufacturing. We are confident that the company holds significant technological and first-mover advantages in hybrid bonding equipment, positioning it well to capitalize on the widespread adoption of chiplet architecture in the coming years.

Performance in IT services was aided by sharp gains from cloud-based commerce platform Shopify Inc. and syndicated research provider Gartner, Inc. Shopify’s stock rose after the company’s excellent financial results featured gross merchandise value growth of 22% year-on-year, revenue growth of 25%, and non-GAAP operating margins in excess of 15% (and up 1,900 bps year-on-year). The company also hosted a well-attended investor day in which management shared a variety of data points showcasing the company's growing success in new segments, such as enterprise, business-to-business, and offline commerce. Gartner’s shares soared after reporting excellent quarterly earnings results, with impressive growth in its core subscription research businesses. We believe Gartner will emerge as a critical decision support resource for every company evaluating the opportunities and risks of artificial intelligence for its business. We expect this development to provide a tailwind to Gartner’s volume growth and pricing realization over time.

Somewhat offsetting the above were adverse impacts associated with the Fund’s unique exposure to technology-related companies outside of IT, such as Tesla, Inc. and Rivian Automotive, Inc. in automobiles, Ceridian HCM Holding Inc. in professional services, and Tencent Holdings Limited in interactive media & services. Electric vehicle manufacturers Tesla and Rivian were the top detractors for company-specific reasons. We remain shareholders. Shares of Ceridian, a leader in payroll and human capital management (HCM) software, declined as investors erroneously extrapolated growth issues at competitor Paycom onto the broader industry. We believe Paycom’s issues are completely idiosyncratic. We also believe investors are concerned that slowing employment growth will reduce Ceridian's growth rate in the near term. While Ceridian has some exposure to employment levels, it is benefiting from secular trends around the modernization of HCM software and growing adoption of software-as-a-service. We believe Ceridian can continue to grow above 20%, helped by share gains, a move up-market, early international traction, and increasing success in cross-selling to existing customers. Shares of Chinese technology conglomerate Tencent declined for the period held due to Chinese regulatory action around video games as well as continued uncertainty around China's macroeconomic recovery and reopening. We exited our position.

as of 12/31/23

Yearly Attribution Analysis (for year ended 12/31/2023)

Baron Technology Fund (Institutional Shares) produced a substantial gain of 63.38% for the year, meaningfully outperforming the MSCI ACWI Information Technology Index by 12.36% due to stock selection and differences in industry exposures.

Favorable stock selection in semiconductors & semiconductor equipment was responsible for about a third of the outperformance in the period. Strength was led by triple-digit gains from Advanced Micro Devices, Inc. (AMD) and NVIDIA Corporation. AMD’s shares ripped higher as the company began to see the early stages of recovery in its Client business and launched its MI300 GPU product while providing strong initial revenue guidance and commentary supporting data center GPU and CPU demand into 2024. NVIDIA had a banner 2023, with the company’s stock rising nearly 240% as a result of the unprecedented demand acceleration for generative artificial intelligence (AI). The company is seeing the fruits of its nearly 20-year investment in AI and accelerated computing with data center revenues growing five-fold from $3 billion in 2019 to $15 billion in 2022 and expected to triple to $45 billion in 2023. This extraordinary growth in revenues drove an even faster growth in earnings-per-share, resulting in multiple contraction despite the rapid rise in shares. Lam Research Corporation, Monolithic Power Systems, Inc., Marvell Technology, Inc., BE Semiconductor Industries N.V., and Taiwan Semiconductor Manufacturing Company Limited were other notable contributors in the industry.

Additional tailwinds to performance came from the Fund’s investments in automobiles, broadline retail, and electronic equipment instruments & components, which together contributed 700-plus basis points of relative gains. The Fund benefited from its unique exposure to automobiles and broadline retail, where electric vehicle (EV) manufacturer Tesla, Inc. and retailer and cloud services provider Amazon.com, Inc. were the principal drivers of outperformance. Tesla’s shares rebounded after coming under significant pressure towards the end of 2022 due to investor concerns about macroeconomic uncertainty, softer demand, stronger competition, and headwinds to profitability. Throughout 2023, Tesla experienced a degradation in margins as it reduced prices, but, while margins declined, they remained healthy, allowed robust investments in growth, and significantly outperformed the negative EV margins of the vast majority of its competitors. 2023 also represented a record year for the Energy division's revenues and margins. Tesla continued to demonstrate its innovation engine, including launching its highly anticipated Cybertruck, initiating the production of its Dojo compute, releasing important updates to its Autopilot solution, and expanding its battery activities. Amazon was a top contributor after benefiting from a material improvement in overall operating profit and a better backdrop for technology stocks throughout much of the year.

Gains in electronic equipment instruments & components were due to a combination of stock selection and lower exposure to this lagging industry. The Fund’s lone investment in the industry, hospitality-focused software-as-a-service vendor PAR Technology Corporation, aided performance. PAR’s shares rose during the year as the company continued to deliver strong growth while moving closer to profitability and announced some large wins for its software. The restaurant industry has historically underinvested in technology, and PAR is building an all-in-one platform for enterprise restaurants to run the most critical portions of their technology stacks. PAR remains well positioned given limited industry competition, accelerating adoption of cloud platforms, and a renewed focus on R&D and sales efficiency. With new products ramping, including payments and online ordering, we believe PAR will deliver on its 20% to 30% subscription revenue growth targets for the next several years with possible significant upside if PAR closes some of its potential large customer deals. We further believe the company will turn profitable in the next several quarters as it controls operating expenses while delivering strong growth. PAR should also continue to acquire accretive bolt-on targets to accelerate its growth and profitability trajectory.

Cash exposure in a rapidly advancing market along with poor performance from outsourced software development provider Endava plc in IT services were the only material detractors in the period. Endava’s stock lagged during the first half the year as macroeconomic uncertainty weighed on client demand and revenue growth. However, share price performance improved in the second half of the year due to optimism that revenue growth will soon improve. Management expects a growing pipeline of large projects from new customers will convert into higher revenue and expanding margins in 2024. Additionally, the company has been acquisitive and is benefiting from vendor consolidation. We remain investors because we believe Endava will continue gaining share in a large global market for IT services.