Baron Opportunity Fund: Latest Insights and Commentary

After selling off in March due to the U.S.-Iran conflict and disruptions in the Strait of Hormuz, U.S. equities rallied to new record highs during the second quarter, with most of the gains coming in April and May. Given narrow market breadth and concentrated position sizes in recent years, the gap in performance between the market cap-weighted S&P 500 Index and the equal-weighted version has reached extremes not seen since the dotcom bubble era (based on rolling three-year results). 

U.S. stocks saw a comeback after ending the prior quarter slightly down. The AI secular growth narrative was the principal driver of market returns, overshadowing uncertainty about a potential resolution to the U.S.-Iran conflict, shifting Federal Reserve rate expectations, and depressed consumer sentiment from high living costs, persistent inflation, and elevated borrowing rates. 

The S&P 500 posted one of its strongest quarterly profit prints in five years, thanks largely to the Magnificent Seven cohort, which reported blended earnings growth in excess of 60% (versus low double digits for other constituents in the Index). The other contributors were primarily Information Technology (IT) stocks—specifically companies that are perceived to be direct beneficiaries of AI capital spending and electrification and what the market has come to call “AI winners." 

Looking ahead, we remain focused on well-managed companies with durable competitive advantages and attractive growth prospects. While macroeconomic and policy uncertainty persist, we believe maintaining a disciplined, long-term perspective and emphasizing company fundamentals will be essential to navigating the evolving landscape.

CONTRIBUTORS

• Space Exploration Technologies Corp. (SpaceX) develops and launches advanced rockets, satellites, and spacecraft, with the long-term goal of making humanity multi-planetary. Shares rose as the company successfully completed the largest initial public offering in history, raising more than $85 billion. The proceeds are expected to accelerate growth across massive addressable markets, such as connectivity, launch, terrestrial and space infrastructure, and AI. Fundamental momentum was further reinforced by landmark compute hosting deals totaling tens of billions of dollars annually, including agreements with market leaders Anthropic and Google. SpaceX also announced its acquisition of Cursor, a premier enterprise AI-powered coding platform. Integrating Cursor’s technology, talent, and customer base provides another strategic stepping stone into the vast opportunities within AI applications and agentic systems. Lastly, the company conducted a successful test flight of the latest version of Starship, demonstrating meaningful advancements in rapid and full reusability. We believe these developments support sustained long-term revenue and profit growth well beyond current levels.
• NVIDIA Corporation is a global fabless semiconductor company specializing in compute and networking platforms for accelerated computing. Shares increased as the company delivered strong quarterly results and remains on track to grow much faster than previously anticipated over the next two years. NVIDIA’s offerings continue to demonstrate strong differentiation as the industry transitions from training AI models to chatbot inference and now into the agentic era, where AI agents autonomously execute tasks. This was particularly evident when the company noted that it is poised to become the largest central processing unit (CPU) supplier globally, a product category it has not historically focused on. We retain conviction in NVIDIA as a core long-term holding, viewing its full-stack platform, software moat, and visibility into sustained hyperscaler capital spending as durable advantages that support multi-year earnings power.
• Broadcom Inc. is a semiconductor and infrastructure software company that designs custom AI chips and networking silicon for cloud and enterprise customers. Shares performed well during the quarter as the company demonstrated that it is, in many ways, the quiet counterweight to the merchant graphics processing unit (GPU) trade. As the largest cloud companies race to design their own AI accelerators, Broadcom is the partner they turn to help build them. As a result, a trend often framed as a threat to merchant chip incumbents has instead become one of Broadcom's biggest tailwinds. Management described demand for its AI silicon as insatiable and projected growth to accelerate sharply, while multi-year programs with several of the largest technology platforms provide a level of visibility few chip companies enjoy. The VMware enterprise software franchise adds a steady, high-margin layer on top. We retain conviction in Broadcom as a core long-term holding, viewing its custom silicon design wins, AI networking leadership, and software annuity as durable advantages that support multi-year earnings power.

DETRACTORS

• GDS Holdings Limited is a leading developer and operator of high-performance data centers, operating in key cities across China and expanding rapidly across Asia. Despite solid operating results and strong performance earlier in the year, the stock declined in the second quarter. Several factors weighed on performance, including management's commentary around the components of full-year guidance, a material step-up in expected capital expenditures over the next few years, a slight delay in the expected timing of an inflection in underlying growth. We trimmed our position and reallocated capital to ideas where we have greater visibility and lower exogenous risk, particularly given the current geopolitical environment. However, we continue to see evidence of the growing AI wave in China through significant bookings growth and believe the market underappreciates the value of GDS's stake in its spun-out international subsidiary, DayOne.
• Shares of property and casualty (P&C) insurance software vendor Guidewire Software, Inc. declined after a handful of deals slipped from the fiscal third quarter into the fiscal fourth quarter. We believe this is purely a timing issue, with these deals having since closed in the current period. Guidewire’s InsuranceSuite platform serves as the core system of record for insurance carriers, functioning as the single source of truth for the policies an insurer writes, the claims it processes, the premiums it collects, and the payments it makes. We think the core-system opportunity alone represents nearly $20 billion of annual recurring revenue, or roughly 20 times Guidewire’s current size. In our view, AI will meaningfully expand this opportunity by enabling automation and intelligence on top of the core system of record. Guidewire is already bringing new AI-enabled capabilities to market and signing customers, and we expect adoption to accelerate over the coming year. Finally, we expect Guidewire to benefit from the same internal productivity enhancements AI is driving across enterprises, which should help it grow faster with lower costs and ultimately improve profitability.
• CoStar Group, Inc. is the leading provider of information and marketing services to the commercial and residential real estate industries. Shares fell due to multiple compression driven by rising AI fears. The market has increasingly come to view AI as an existential risk for a growing number of industries, including software, business services, information services, and video games. While there is little evidence of any fundamental impact on these sectors, investors have largely adopted a “shoot first and ask questions later” approach, leading to significant stock price declines. We continue to own CoStar due to its enviable business model, differentiated data assets, and meaningful growth opportunities in providing enhanced real estate information, analytics, and marketplace offerings. The company also maintains a substantial cash balance, which we are hopeful will be used to aggressively repurchase shares at current depressed valuation levels.

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.

Baron Opportunity Fund (the Fund) posted a strong gain of 27.07% (Institutional Shares) for the second quarter, outpacing the Russell 3000 Growth Index (the Index) by 10.0%. According to MSCI’s Barra factor attribution, stock selection was responsible for most of the outperformance in the period, though style biases, specifically higher exposure to Beta, also provided a tailwind to performance. The Beta factor posted its best three-month performance on record during the period, contributing a significant portion of the style-specific gains.

From a sector perspective, stock selection in Communication Services contributed 1,000-plus basis points of relative gains, with the principal driver being the Fund’s significant position in rocket, satellite, and spacecraft manufacturer Space Exploration Technologies Corp. (SpaceX). The company completed the largest initial public offering in history during the quarter, raising more than $85 billion. The proceeds are expected to accelerate growth across massive addressable markets, such as connectivity, launch, terrestrial and space infrastructure, and AI. Fundamental momentum was further reinforced by landmark compute hosting deals totaling tens of billions of dollars annually, including agreements with market leaders Anthropic and Google. SpaceX also announced its acquisition of Cursor, a premier enterprise AI-powered coding platform. Integrating Cursor’s technology, talent, and customer base provides another strategic stepping stone into the vast opportunities within AI applications and agentic systems. Lastly, the company conducted a successful test flight of the latest version of Starship, demonstrating meaningful advancements in rapid and full reusability. We believe these developments support sustained long-term revenue and profit growth well beyond current levels.

Solid stock selection in Health Care and Information Technology (IT) also contributed to outperformance in the period. Strength in Health Care was attributable to technology-driven musculoskeletal care platform Hinge Health, Inc. and biotechnology company argenx SE. Hinge Health’s stock appreciated following an investor day that expanded the market's view of the company's long-term opportunity. Since its initial public offering, Hinge Health has roughly doubled its long-term growth outlook while dramatically increasing its margin target, demonstrating that the business scales far better than the market initially assumed. Hinge Health benefits from a compounding dynamic: each new clinical vertical, most recently Migraine, leverages the same sales force and client relationships, allowing the company to grow more efficiently as clients consolidate a greater share of spending onto the platform. Newer offerings such as Hinge Select further expand the company's addressable market into surgical care coordination. Management also pointed to significant gains in engineering productivity from AI, supporting margin expansion. We view Hinge Health as a durable compounder in a large, underpenetrated market.

Argenx is best known for developing Vyvgart, the leading FcRn inhibitor for the treatment of autoimmune conditions. Shares rose after a period of prior weakness, which may have been partly driven by the retirement of longtime CEO Tim Van Hauwermeiren in early 2026. We view the transition to Karen Massey, who previously led the company's operations, as largely non-disruptive and believe she is well positioned to continue executing the company's strategy. Shares also benefited from optimism ahead of several clinical readouts, including data from studies of Vyvgart in immune-mediated necrotizing myopathy and dermatomyositis, expected in the third quarter of 2026, as well as empasibrupart in multifocal motor neuropathy, expected in the fourth quarter of 2026. Vyvgart continues to launch well in generalized myasthenia gravis and chronic inflammatory demyelinating polyneuropathy, where we believe it has established itself as an important treatment option. We expect Vyvgart to demonstrate efficacy across an expanding range of autoantibody-driven autoimmune conditions over time and remain encouraged by argenx's pipeline progress.

A portion of the gains in IT came from observability and cloud monitoring platform Datadog, Inc., whose stock price more than doubled after the company reported its strongest financial results in years. Revenue accelerated to 32% year-over-year growth, marking the fourth consecutive quarter of acceleration and meaningfully exceeding consensus estimates. Operating margins and free cash flow also surpassed expectations. Management raised full-year revenue guidance by roughly $240 million against a $50 million beat, with next-quarter guidance implying continued strength. Critically, the strength was broad-based: non-AI core customer revenue growth accelerated into the mid-20% range at scale, while Datadog's AI-native customer cohort diversified and expanded to 22 customers spending more than $1 million annually. Net revenue retention reaccelerated into the low-120% range, and unit economics remained best-in-class with 80% gross margins and high-20% free cash flow margins. We view observability as a structural beneficiary of the AI buildout through cloud migration, faster application deployment, and an increasingly complex technology stack. These broadening growth drivers reinforce our conviction in the long-term thesis.

The Fund also benefited from being overexposed to semiconductor stocks, which were among the best performing segments in the Index during the period. 

No sectors materially detracted from performance.