Baron Technology Fund: Latest Insights and Commentary

U.S. equities were broadly higher in the third quarter, building on gains from the prior quarter. The S&P 500 Index and NASDAQ Composite set new record highs, most recently on September 22, and the Dow Jones Industrial Average ended the quarter at an all-time high. Small caps led the market recovery, with the Russell 2000 Index finally surpassing its previous record high achieved almost four years ago on November 8, 2021. Market volatility remained muted during the quarter as the CBOE Volatility Index (VIX) continued to trade in the mid-teens, well below its long-term average of around 20. 

The preeminent driver of market strength was the increased likelihood of Federal Reserve (Fed) rate cuts, prompted by signs of weakness in the labor market and the subsequent emergence of more dovish Fed commentary. Rate cut expectations rose in early August following a much weaker-than-expected July nonfarm payrolls report and significant downward revisions to prior numbers. Dovish Fedspeak intensified as the month wore on, with Chair Powell hinting a possible interest rate cut while delivering remarks at the Fed’s annual Jackson Hole conference. Similarly, Governor Waller continued to advocate for cuts while speaking at the Economic Club of Miami. The Fed eventually resumed its rate-cutting cycle at the September meeting, lowering its policy rate by 25 basis points to a range of 4% to 4.25%, after being on hold since its previous cut last December. Robust corporate earnings, narrowing trade uncertainties, a resilient consumer, increased M&A and IPO activity, and sustained AI optimism also contributed to market gains during the quarter. 

The Magnificent Seven complex dominated market returns for a second consecutive quarter, accounting for nearly two-thirds of the S&P 500 Index’s third-quarter gains. The group appreciated 15.5% in the period, outperforming all other securities in the Index, which were up 4.6%, by a double-digit margin. Tesla (+40.0%), Alphabet (+38.1%), Apple (+24.2%), and NVIDIA (+18.1%) posted the largest gains. Meta and Amazon were essentially flat in the period, trailing the broader Index. 

Most sectors closed higher in the period, with Information Technology, Communication Services, and Consumer Discretionary being the only sectors to outperform the broader market thanks to the heavy influence of the Magnificent Seven. Consumer Staples was the only sector to decline in the period, driven by broad-based weakness across a range of sub-industries, including distillers & vintners, personal care products, food retail, tobacco, and household products. Other laggards were Real Estate, Financials, Health Care, Industrials, Energy, and Materials. From a style perspective, small caps outperformed in the third quarter, rising more than 12% and narrowing the gap with mid- and large-cap stocks this year. Performance was mixed between growth and value, with growth stocks dominating in July, losing out to value in August, and rebounding in September. Despite recent volatility, growth generally remains ahead of value year to date, with the largest differential in the mid- and large-cap segments thanks to the heavy influence of Palantir and the broader Magnificent Seven. 

Beyond the U.S., emerging market (EM) equities meaningfully outperformed in September to finish ahead of their developed market counterparts for the quarter. The rally in Chinese equities was largely responsible for EM outperformance, with gains being driven by investor optimism about AI innovation, which bolstered Chinese technology and internet companies. Targeted government initiatives, easing trade tensions with the U.S., and significant domestic capital inflows also contributed to strength in China. Taiwanese and Korean equities also performed well in the period, overshadowing weakness in India, where equity markets were pressured by underwhelming corporate earnings and concerns about recently enacted U.S. tariffs. Foreign investor flows in Indian markets turned negative in the third quarter after being meaningfully positive in May and June. Performance in developed markets was held back by weakness in continental Europe (Denmark, Germany, Norway, Switzerland, France, and Sweden). European equities were hurt by weak corporate earnings, Trump tariff headwinds, and political instability, particularly in France, where the country’s prime minister resigned after losing a crushing confidence vote in parliament.

CONTRIBUTORS

• NVIDIA Corporation is a fabless semiconductor company specializing in compute and networking platforms for accelerated computing. The company's dominant position in AI infrastructure—with a comprehensive portfolio spanning GPUs, systems, software, and high-performance networking solutions—continues to drive strong performance. Shares rose during the quarter as investor confidence in AI infrastructure expansion grew. NVIDIA reported near-term visibility of tens of gigawatts in AI buildouts, with each gigawatt representing an estimated $35 billion total addressable market (TAM). During its last earnings call, the company announced that its long-term TAM expanded from $1 trillion to between $3 and $4 trillion, and more recently to $5 trillion. As AI infrastructure investment accelerates, NVIDIA’s leadership continues to strengthen through durable moats across compute silicon, networking, systems, software, and supply chain. We remain highly confident in AI’s potential to transform the global economy and in NVIDIA’s pivotal role as the leading enabler of that transformation, positioning it to capture significant long-term value in the AI era.
• Broadcom Inc. is a leading fabless semiconductor and enterprise software company, generating approximately 60% of revenue from semiconductors and 40% from software. The company is strategically positioned at the intersection of high-performance AI compute and networking infrastructure, while also demonstrating disciplined execution in software. Broadcom has extended its leadership in merchant networking silicon from the cloud era into the AI era and is regarded as the most reliable silicon partner for AI foundational model builders designing custom chips to train frontier models. Shares rose during the quarter as Broadcom provided strong business visibility into next year. The company continues to execute with its key customer, Google, is on track for volume production with two additional customers (likely Meta and ByteDance), and recently secured a fourth customer (likely OpenAI) with orders worth $10 billion next year. Beyond AI, Broadcom is advancing VMWare integration, while its non-AI semiconductor businesses appear to be bottoming and may gradually recover in the coming quarters. We retain our long-term conviction in Broadcom's positioning within the AI ecosystem.
• Tesla, Inc. designs, manufactures, and sells fully electric vehicles, related software and components, solar products, and energy storage solutions. Shares rose during the quarter due to three key catalysts. First, Tesla’s core automotive business is showing renewed strength, with expectations for rising third-quarter delivery volumes across major markets following an enthusiastic consumer response to a new Model Y variant in China. Second, investor confidence in the company's long-term vision and in Elon Musk’s leadership was reinforced by a newly proposed CEO compensation package and nearly $1 billion in personal share purchases by Musk. ​Finally, Tesla’s AI initiatives continue to advance rapidly, highlighted by the Austin robotaxi network’s expansion from 20 to over 170 square miles since its June 2025 launch and plans for rollouts to additional cities. The upcoming Full Self-Driving Version 14 release is also expected to deliver a major leap in capability for the company’s consumer-owned fleet, while humanoid robot production is anticipated next year as Tesla finalizes its latest Optimus design.

DETRACTORS

• PAR Technology Corporation is a leading global provider of software, systems, and service solutions to the restaurant industry. Shares fell during the quarter after the company lowered its full-year growth outlook to 15% from 20%, reflecting a weaker-than-expected first half driven by soft macroeconomic conditions and deliberate rollout delays for certain customers. These delays were strategic, allowing PAR to focus on securing contracts with several large enterprise restaurant chains currently in late-stage negotiations, at least one of which could meaningfully expand the company’s scale. Despite the slower start to the year, management remains confident in achieving 20% annual recurring revenue growth over the next 12 months, supported by a strong pipeline of contracted and prospective customers, including its ongoing rollout with Burger King. As more enterprise-scale restaurants upgrade their technology stack, we believe PAR is well positioned to capture outsized share as the leading cloud-based platform in the industry. Strong software revenue growth combined with rapidly scaling profitability should drive meaningful long-term performance.
• The Trade Desk is the leading internet advertising demand-side platform (DSP), enabling agencies to efficiently purchase digital advertising across Connected TV (CTV), PC, mobile, and online video channels. Shares declined during the quarter as the company reported in-line earnings relative to conservative guidance amid a strong quarter for peers in digital advertising. The Trade Desk’s total addressable market remains large and underpenetrated, but advertisers may take longer to shift towards biddable programmatic CTV advertising and could be drawn to lower fees offered by competitors. We continue to monitor the competitive landscape, particularly as Amazon enters the market more meaningfully with its rapidly improving DSP offering. Even so, we believe The Trade Desk remains the market leader. Execution has improved in managing the rollout and client adoption of the company’s upgraded Kokai platform, and operations have stabilized following organizational changes in late 2024. While growth may moderate slightly going forward, we believe The Trade Desk’s margin profile and long-term prospects remain defensible, particularly given the stock’s lower valuation.
• Spotify Technology S.A. is a leading global digital music service, offering on-demand audio streaming through paid premium subscriptions and an ad-supported model. Shares detracted from performance following mixed quarterly results and a longer timeline for margin expansion. This was partly offset by announcements of price increases across multiple regions and completed negotiations with major record labels. Despite recent price hikes, user growth remained strong at a double-digit pace, with high engagement and low churn even amid consumer uncertainty. The company has been on a path to structurally increase gross margins, aided by its high-margin artist promotions marketplace, growing contribution from podcasts, and ongoing investments in advertising. Spotify also continued to innovate on the product side, calling 2025 the "year of accelerated execution," with priorities in improving advertising, expanding into video, developing a Super Premium tier, and taking more market share. We continue to view Spotify as a long-term winner in music streaming with potential to reach 1 billion-plus monthly active users.

Against a favorable backdrop for technology stocks during the third quarter, Baron Technology Fund (the Fund) appreciated 5.89% (Institutional Shares), trailing the MSCI ACWI Information Technology Index (the Index), which rose 12.76%. The relative weakness was driven by a combination of active industry exposures and disappointing stock selection.

About 60% of the underperformance came from the Fund’s unique exposure to certain technology-related companies that are classified outside of Information Technology (IT), such as The Trade Desk in media, Spotify Technology S.A. in entertainment, and Amazon.com, Inc. in broadline retail. Shares of leading internet advertising demand-side platform (DSP) Trade Desk declined after earnings results failed to outstrip management’s prior conservative guidance amid a strong quarter for peers in digital advertising. Trade Desk’s total addressable market remains large and underpenetrated, but advertisers may take longer to shift towards biddable programmatic Connected TV advertising and could be drawn to lower fees offered by competitors. We continue to monitor the competitive landscape, particularly as Amazon enters the market more meaningfully with its rapidly improving DSP offering. Even so, we believe Trade Desk remains the market leader. Execution has improved in managing the rollout and client adoption of the company’s upgraded Kokai platform, and operations have stabilized following organizational changes in late 2024. While growth may moderate slightly going forward, we believe Trade Desk’s margin profile and long-term prospects remain defensible, particularly given the stock’s lower valuation. 

Global audio streaming company Spotify was a top detractor after reporting mixed quarterly results and a longer timeline for margin expansion, though this was partly offset by announcements of price increases across multiple regions and completed negotiations with major record labels. Despite recent price hikes, user growth remained strong at a double-digit pace, with high engagement and low churn even amid consumer uncertainty. The company has been on a path to structurally increase gross margins, aided by its high-margin artist promotions marketplace, growing contribution from podcasts, and ongoing investments in advertising. Spotify also continued to innovate on the product side, calling 2025 the "year of accelerated execution," with priorities in improving advertising, expanding into video, developing a Super Premium tier, and taking more market share. We continue to view Spotify as a long-term winner in music streaming with potential to reach 1 billion-plus monthly active users.

Retailer and cloud services provider Amazon underperformed despite posting solid results across its major businesses. Amazon Web Services (AWS) growth accelerated less than scaled cloud infrastructure peers during the quarter, leading to relative underperformance. We believe Amazon’s lack of cloud acceleration with AI to be temporary. As AWS obtains more compute capacity in the coming quarters, we expect AWS revenue to accelerate given significant customer demand. We continue to monitor progress across the cloud hyperscalers and believe AWS will ultimately be competitive in generative AI, given their scale and technical infrastructure advantages. On the retail side, the consumer demand environment remains healthy, with a strong July Prime Day and limited tariff-related impacts. Long term, Amazon has substantially more room to grow in e-commerce, where it has less than 15% penetration in its total addressable market. On the bottom line, Amazon has room to materially improve its profitability across core North American retail, AWS, and international retail, given strong prioritization towards cost discipline and optimizations.

Stock selection accounted for the remaining underperformance, with the primary culprit being PAR Technology Corporation in electronic equipment instruments & components. PAR is a leading global provider of software, systems, and service solutions to the restaurant industry. Shares fell during the quarter after the company lowered its full-year growth outlook to 15% from 20%, reflecting a weaker-than-expected first half driven by soft macroeconomic conditions and deliberate rollout delays for certain customers. These delays were strategic, allowing PAR to focus on securing contracts with several large enterprise restaurant chains currently in late-stage negotiations, at least one of which could meaningfully expand the company’s scale. Despite the slower start to the year, management remains confident in achieving 20% annual recurring revenue growth over the next 12 months, supported by a strong pipeline of contracted and prospective customers, including its ongoing rollout with Burger King. As more enterprise-scale restaurants upgrade their technology stack, we believe PAR is well positioned to capture outsized share as the leading cloud-based platform in the industry. Strong software revenue growth combined with rapidly scaling profitability should drive meaningful long-term performance.

Lack of exposure to Index heavyweight Apple Inc. in technology hardware storage & peripherals was another material headwind after the company’s shares rose 24.2% in the period, detracting approximately 130 basis points from relative results. However, this adverse impact was offset by significantly lower exposure to lagging software stocks, which added 130-plus basis points of relative gains.

Other favorable impacts came from the Fund’s unique exposure to automobiles and interactive media & services, where electric vehicle manufacturer Tesla, Inc. and forum-based social network Reddit, Inc. posted significant gains. Tesla’s shares appreciated during the quarter due to three key catalysts. First, Tesla’s core automotive business is showing renewed strength, with expectations for rising third-quarter delivery volumes across major markets following an enthusiastic consumer response to a new Model Y variant in China. Second, investor confidence in the company's long-term vision and in Elon Musk’s leadership was reinforced by a newly proposed CEO compensation package and nearly $1 billion in personal share purchases by Musk. ?Finally, Tesla’s AI initiatives continue to advance rapidly, highlighted by the Austin robotaxi network’s expansion from 20 to over 170 square miles since its June 2025 launch and plans for rollouts to additional cities. The upcoming Full Self-Driving Version 14 release is also expected to deliver a major leap in capability for the company’s consumer-owned fleet, while humanoid robot production is anticipated next year as Tesla finalizes its latest Optimus design.

Reddit shares rose sharply after the company delivered 78% year-over-year revenue growth. User engagement also improved as the company enhanced content discoverability and continued its international expansion efforts. Advertisers view Reddit as an increasingly attractive platform given its unique user communities, strong return on investment from contextual targeting, and relatively low ad costs. The company has steadily rolled out new ad products, including promising initiatives such as search advertising, which has helped bring new advertisers onto the platform and drive higher spending. Revenue from data licensing for AI model training remains highly margin accretive, and the business model is already profitable with limited incremental investment required. We expect these positive trends to sustain long-term growth.