Baron Partners Fund: Latest Insights and Commentary

CONTRIBUTORS

• Shopify Inc., a leading commerce platform for merchants of all sizes, contributed to performance. Second-quarter results marked another quarter of exceptional execution, with gross merchandise volume (GMV) rising 32% year-over-year to $116 billion and revenue increasing 34%. This represented the fifth consecutive quarter of 30%-plus growth across GMV, revenue, gross profit, operating income, and free cash flow. Merchant solutions revenue grew 37% year-over-year on higher payments penetration, while operating income increased 68% and free cash flow margin expanded to 18% from 16%. Growth was broad-based across merchant sizes, geographies, and channels, with business-to-business (B2B) GMV up 76% and offline GMV up 32%. Third-quarter guidance for low-30% revenue growth and further operating expense leverage exceeded expectations. We retain conviction in Shopify as a durable compounder and believe its two decades of proprietary merchant and buyer data position the company as a key beneficiary as commerce shifts toward AI-driven discovery and agentic checkout.
• Shares of syndicated research provider Gartner, Inc. rallied amid multiple expansion across information services stocks. We believe Gartner’s contract value growth is poised to reaccelerate as the company enhances its product offering, retrains its sales force, and benefits from easier comparisons in its public sector end market. We also view Gartner as an underappreciated beneficiary of AI, as organizations increasingly seek guidance on the risks and opportunities presented by the technology. In addition, we expect earnings and free cash flow to grow meaningfully faster than revenue as Gartner expands margins and returns excess capital through share repurchases. Management is on pace to deploy nearly $2 billion of free cash flow toward share repurchases this year, which we estimate could reduce the company's share count by roughly 15% to 20%.
• Moderna, Inc. is a biotechnology company developing mRNA-based vaccines and therapeutics across infectious disease and oncology. Shares rose sharply during the quarter. Moderna’s personalized cancer vaccine, developed with Merck, met key endpoints in a Phase 3 melanoma trial, a milestone the market viewed as validation of the broader neoantigen oncology platform. We retain long-term conviction in Moderna given its established mRNA manufacturing base, disciplined cost structure following recent workforce reductions, and expanding late-stage oncology pipeline. Together, we believe these strengths support a path to durable, diversified growth beyond the company’s legacy COVID franchise.

DETRACTORS

• Space Exploration Technologies Corp. (SpaceX) develops and launches advanced rockets, satellites, and spacecraft, with the long-term goal of making humanity multi-planetary. The stock detracted from performance as shares pulled back from highs reached after the initial public offering, despite strong underlying fundamentals. We remain long-term shareholders and believe the company is in the early stages of a multi-decade growth opportunity. SpaceX’s first public-company results reinforced our conviction, with revenue nearly doubling year-over-year and losses narrowing sharply on high incremental margins. Growth was driven by rapidly scaling, multibillion-dollar compute-hosting deals with AI leaders, including Anthropic and Google, alongside Starlink momentum. Management guided to a robust $100 billion annualized revenue run rate by year-end 2026 and up to five times more compute exiting 2027, well above Street expectations. SpaceX also closed its acquisition of Cursor, a premier enterprise AI-powered coding platform, accelerated product development with Grok Bot and more advanced Grok models, and progressed Starship toward full reusability.
• Tesla, Inc. manufactures electric vehicles, solar products, and energy storage solutions and develops real-world AI technologies. Shares fell as record second-quarter revenue and deliveries were overshadowed by near-term profit pressure from increased investment in key opportunities across autonomy, robotics, and AI chips. As Tesla funds this ambitious multi-year investment cycle, investors are also seeking clearer evidence of robotaxi scaling. We see momentum across the business, with improving automotive demand and accelerating Full Self-Driving (FSD) adoption. The active base reached a record 1.48 million, up 56% year-over-year, with 55% of North American deliveries now including FSD. Unsupervised robotaxi miles are compounding rapidly, with an impeccable safety record across more than one million miles. Cybercab production is ramping, and given the importance of scaling robotaxis safely, we believe Tesla is right to take a deliberate approach to execution. The next-generation AI5 inference chip will also play a central role in the Optimus program. Together, these developments reinforce the robust long-term physical AI opportunity, despite a lengthy path to realizing it.
• Global hotelier Hyatt Hotels Corporation detracted from performance as investors grew concerned that higher oil prices, interest rates, and inflation could pressure consumers and travel budgets. However, consumer spending remains resilient, particularly on travel and experiences. Hyatt continues to grow units at a mid-single-digit rate, while revenue per available room is accelerating from low- to mid-single-digit growth. We expect this to support margin and cash flow expansion, generating capital to reinvest in the business, pursue accretive tuck-in acquisitions, and increase share repurchases. Hyatt’s strong balance sheet provides additional flexibility to fund growth or allocate more capital to buybacks if management believes the stock price does not reflect its underlying value. The stock continues to trade at a significant discount to peers despite a similar mix of fee-for-service business. We believe this discount should narrow as investors see continued growth in the business.

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 Partners Fund’s (the Fund) performance suffered during a volatile quarter in which market sentiment turned against the high-momentum AI infrastructure and energy theme, while previously neglected software and services companies moved to the forefront. The Fund declined by 4.36% (Institutional Shares) but outperformed the Russell Midcap Growth Index (the Index), which fell 5.84%. According to MSCI’s Barra factor attribution, style factors were a substantial tailwind. The Fund’s persistent underexposure to Momentum and Beta paid off as both factors reversed and performed poorly, while its larger-cap positioning added further value. These gains were partly offset by headwinds from industry factors and by stock-specific losses associated with the Fund’s large position in rocket, satellite, and spacecraft manufacturer Space Exploration Technologies Corp. (SpaceX).

From a sector perspective, stock selection drove outperformance, largely on strength in Information Technology (IT), where select holdings in internet services & infrastructure (Shopify Inc.), IT consulting & other services (Gartner, Inc.), and application software (Guidewire Software, Inc.) bounced back as solid fundamental results eased concerns about AI-driven disruption. Stock selection in IT was further enhanced by the Fund’s lack of exposure to semiconductors & semiconductor equipment, as these stocks bore the brunt of the retreat from AI-linked names. Concerns about hyperscaler capital expenditures, open-source competition, and expanding memory supply drove the industry down approximately 20%.

Stock selection in Communication Services and Health Care also added to gains thanks largely to strong performance from Spotify Technology S.A., the world’s largest audio streaming subscription service, and Moderna, Inc., a biotechnology company developing mRNA-based vaccines and therapeutics across infectious disease and oncology. However, adverse allocation effects in both sectors dampened the benefit.

Spotify shares rose during the quarter as investors grew more optimistic about the company’s earnings trajectory and AI strategy. The company reported record second-quarter free cash flow of €797 million, and Premium Subscribers grew 9% year-over-year to 300 million. In August, the board approved a $1.5 billion increase to the share buyback program, further bolstering Spotify stock. Sentiment was also helped by add-on monetization drivers such as audiobooks, the Reserved ticketing feature, and a covers-and-remixes product licensed with Universal Music Group and Merlin. We believe Spotify’s pricing power, expanding add-on products, and operating leverage position it for continued margin expansion and free cash flow growth. 

Shares of Moderna rose sharply after its personalized cancer vaccine, developed with Merck, met key endpoints in a Phase 3 melanoma trial, a milestone the market viewed as validation of the broader neoantigen oncology platform. We retain long-term conviction in Moderna given its established mRNA manufacturing base, disciplined cost structure following recent workforce reductions, and expanding late-stage oncology pipeline. Together, we believe these strengths support a path to durable, diversified growth beyond the company’s legacy COVID franchise.

Lastly, the Fund benefited from being underexposed to the lagging Industrials sector and overexposed to Financials, where FactSet Research Systems Inc., a provider of financial data and analytics, The Charles Schwab Corporation, a leading discount brokerage firm, and Morningstar, Inc., an investment research provider, advanced alongside the broader sector. Shares recovered as concerns about AI disruption of brokerage and other data-driven businesses eased, mirroring the trend in software stocks as investors became less worried that AI would upend traditional business models. Solid fundamental results reinforced the view that these companies’ proprietary data, client relationships, and trusted platforms remain durable competitive advantages.

Somewhat offsetting the above was weakness in Consumer Discretionary, owing to poor stock selection and meaningfully higher exposure to this lagging sector, which buckled under the weight of elevated inflation straining budgets among lower- and middle-income consumers. Tesla, Inc., which manufactures electric vehicles, solar products, and energy storage solutions and develops real-world AI technologies, and Hyatt Hotels Corporation, a global hotelier, were the sector’s top detractors.

Tesla stock declined as record second-quarter revenue and deliveries were overshadowed by near-term profit pressure from increased investment in key opportunities across autonomy, robotics, and AI chips. As Tesla funds this ambitious multi-year investment cycle, investors are also seeking clearer evidence of robotaxi scaling. We see momentum across the business, with improving automotive demand and accelerating Full Self-Driving (FSD) adoption. The active base reached a record 1.48 million, up 56% year-over-year, with 55% of North American deliveries now including FSD. Unsupervised robotaxi miles are compounding rapidly, with an impeccable safety record across more than one million miles. Cybercab production is ramping, and given the importance of scaling robotaxis safely, we believe Tesla is right to take a deliberate approach to execution. The next-generation AI5 inference chip will also play a central role in the Optimus program. Together, these developments reinforce the robust long-term physical AI opportunity, despite a lengthy path to realizing it.

Hyatt’s shares declined as investors worried that higher oil prices, interest rates, and inflation could pressure consumers and travel budgets. Consumer spending, however, remains resilient, particularly on travel and experiences. Hyatt continues to grow units at a mid-single-digit rate, and revenue per available room growth is accelerating from a low- to mid-single-digit pace. We expect this to support margin and cash flow expansion, generating capital to reinvest in the business, pursue accretive tuck-in acquisitions, and increase share repurchases. Hyatt’s strong balance sheet provides added flexibility to fund growth or buy back more stock if management believes the share price does not reflect the company’s underlying value. The stock trades at a significant discount to peers despite a similar mix of fee-for-service business, and we believe the discount should narrow as investors see continued growth.

The remaining material headwind came from the Fund’s lack of exposure to Energy, which was the best performing sector in the Index, as oil prices spiked back above $100 per barrel during the quarter.