Investment Pitches

Pitch Summary:
Global leader in enterprise software, Oracle Corporation (ORCL), was the top contributor to relative performance in the period. ORCL is benefitting from a significant expansion in artificial intelligence (AI) demand and strong booking growth with OpenAI. We believe these results highlight ORCL's ability to effectively cross-sell and upsell apps and infrastructure, as well as the emergence of the company's cloud platform as a competitive offering. In addition, ORCL announced a meaningful partnership with Google Cloud mirroring its existing partnership with Microsoft Azure. The company's ability to leverage the services of both companies without having to rewrite the application helps differentiate and improve ORCL's positioning in the database market. Furthermore, management provided strong guidance for fiscal 2025, including a double-digit increase in total revenue, with growth accelerating throughout the year.

BSD Analysis:
Ariel highlights Oracle's strong positioning in the AI-driven enterprise software market, emphasizing the company's successful expansion into cloud services and strategic partnerships. The fund manager views Oracle's ability to cross-sell and upsell applications and infrastructure as a key competitive advantage, particularly as AI demand accelerates. The partnership with Google Cloud, complementing the existing Microsoft Azure relationship, demonstrates Oracle's platform-agnostic approach that differentiates it in the database market. Management's guidance for double-digit revenue growth in fiscal 2025 with accelerating momentum throughout the year suggests strong execution on the AI opportunity. Oracle's emergence as a credible cloud platform competitor positions it well to capture market share in the rapidly growing AI infrastructure space. The company's ability to leverage multiple cloud partnerships without requiring application rewrites provides operational flexibility and customer value. This strategic positioning in AI and cloud infrastructure makes Oracle an attractive long-term growth play in enterprise software.

Pitch Summary:
CoStar Group, Inc. is a provider of marketing and data analytics services to the real estate industry. Shares detracted from performance in the quarter along with the broader software sector. Most software companies experienced a slowdown in new sales activity in early 2024, leading to guidance reductions and multiple compression. We believe CoStar shares were also impacted by concerns that the company's second quarter financial results will show a deceleration in net new sales of its residential product following outstanding first quarter performance. We remain encouraged by traction in CoStar's residential offering although recognize that progress may not be linear. CoStar began to monetize its new Homes.com platform in February. We believe early momentum can be amplified by the recent NAR class action settlement, which has the potential to disrupt the residential brokerage industry and enhance the return on investment for brokers advertising on Homes.com.

BSD Analysis:
Despite near-term headwinds, Baron Capital maintains conviction in CoStar Group's long-term growth prospects, particularly in the residential real estate market. The fund acknowledges the company's exposure to broader software sector weakness and concerns about potential deceleration in residential product sales following strong Q1 performance. However, Baron remains optimistic about CoStar's residential offering and the monetization of its Homes.com platform, which began in February 2024. The recent NAR class action settlement represents a significant catalyst that could disrupt the traditional residential brokerage industry and create new opportunities for CoStar's platform. Baron believes this settlement will enhance the return on investment for brokers advertising on Homes.com, potentially accelerating adoption and revenue growth. While acknowledging that progress may not be linear, the fund views CoStar's expansion into residential real estate as a substantial long-term opportunity that complements its dominant position in commercial real estate data and analytics.

Pitch Summary:
Space Exploration Technologies Corp. (SpaceX) is a high-profile private company founded by Elon Musk. Its primary focus is on developing and launching advanced rockets, satellites, and spacecrafts, with the ambitious long-term goal of enabling human colonization of Mars. SpaceX is generating significant value with the rapid expansion of its Starlink broadband service. The company is successfully deploying a vast constellation of Starlink satellites in low Earth orbit, reporting substantial growth in active users, and regularly deploying new and more efficient hardware technology. Furthermore, SpaceX has established itself as a leading launch provider by offering highly reliable and cost-effective launches, leveraging the company's reusable launch technology. SpaceX capabilities extend to strategic services such as crewed space flights. Moreover, SpaceX is making tremendous progress on its newest rocket, Starship, which is the largest, most powerful rocket ever flown. This next-generation vehicle represents a significant leap forward in reusability and space exploration capabilities. We value SpaceX using prices of recent financing transactions.

BSD Analysis:
Baron Capital views SpaceX as a transformative aerospace company with multiple revenue streams driving substantial value creation. The fund emphasizes the rapid expansion of Starlink broadband service as a key value driver, with substantial growth in active users and continuous deployment of more efficient satellite technology. SpaceX's position as a leading launch provider is supported by its reusable rocket technology, which offers cost-effective and reliable launch services. The company's capabilities in crewed space flights demonstrate its technical expertise and diversified service offerings. The development of Starship represents a significant technological advancement, being the largest and most powerful rocket ever flown with enhanced reusability features. Baron values the company based on recent private financing transactions, suggesting strong institutional investor confidence. The combination of Starlink's commercial success, launch services dominance, and next-generation rocket development positions SpaceX for continued growth in the expanding space economy.

Pitch Summary:
Tesla, Inc. manufactures electric vehicles, related software and components, and solar and energy storage products. The stock contributed as Tesla continued to drive vehicle manufacturing costs lower, accelerate the launch of new models, and invest heavily in its lucrative AI initiatives. Shareholders reaffirmed the CEO's compensation plan, alleviating personnel and legal uncertainties. Despite material operational complexities resulting in significant shutdowns of key manufacturing facilities and lower sales volume, Tesla presented better-than-expected margins in the quarter. It expects to launch a lower cost model as soon as late 2024, which should result in accelerated revenue growth, reduced manufacturing costs, and increased factory utilization. The company continued to advance its autonomous driving capabilities, expanding its already significant data centers and developing its humanoid robot Optimus. These investments increased confidence in the attractive growth opportunities that remain ahead.

BSD Analysis:
Baron Capital maintains a strong bullish stance on Tesla, emphasizing the company's operational improvements and strategic positioning for future growth. The fund highlights Tesla's ability to reduce manufacturing costs while maintaining better-than-expected margins despite operational challenges including facility shutdowns. The upcoming launch of a lower-cost model in late 2024 represents a significant catalyst for accelerated revenue growth and improved factory utilization. Tesla's investments in autonomous driving capabilities and data center expansion demonstrate the company's commitment to AI-driven revenue streams. The development of the Optimus humanoid robot showcases Tesla's diversification beyond automotive into robotics. The shareholder approval of CEO compensation removes a key overhang and provides management stability. Baron views Tesla's integration of hardware with proprietary AI software as creating sustainable competitive advantages that will drive long-term value creation.

Pitch Summary:
CoStar Group, Inc. is a provider of marketing and data analytics services to the real estate industry. Shares detracted from performance in the quarter along with the broader software sector. Most software companies experienced a slowdown in new sales activity in early 2024, leading to guidance reductions and multiple compression. We believe CoStar shares were also impacted by concerns that the company's second quarter financial results will show a deceleration in net new sales of its residential product following outstanding first quarter performance. We remain encouraged by traction in CoStar's residential offering although recognize that progress may not be linear. CoStar began to monetize its new Homes.com platform in February. We believe early momentum can be amplified by the recent NAR class action settlement, which has the potential to disrupt the residential brokerage industry and enhance the return on investment for brokers advertising on Homes.com.

BSD Analysis:
Despite near-term headwinds, Baron maintains conviction in CoStar's long-term growth prospects driven by its expansion into residential real estate. The company's Homes.com platform, launched in February, represents a significant opportunity to disrupt the residential brokerage industry. The recent NAR class action settlement creates a favorable environment for CoStar's platform by potentially changing industry dynamics and improving ROI for broker advertising. While the company faces typical software sector challenges with slower new sales activity, management's track record in commercial real estate data and analytics provides confidence in executing the residential strategy. CoStar's data moat and market-leading position in commercial real estate create cross-selling opportunities and competitive advantages in the residential market.

Pitch Summary:
P&C insurance software vendor Guidewire Software, Inc. was up 18.1% for the quarter, adding 85 bps to performance. After a multi-year transition period, we believe the company's cloud transition is substantially complete. We believe that cloud will be the sole path forward, with annual recurring revenue (ARR) benefiting from new customer wins and migrations of the existing customer base to InsuranceSuite Cloud. We also expect the company to shift R&D resources to product development from infrastructure investment, which should help drive cross-sales into its sticky installed base and potentially accelerate ARR over time. We are encouraged by Guidewire's subscription gross margin expansion, which improved by approximately 1,050 bps in its most recently reported quarter. We believe Guidewire will be the critical software vendor for the global P&C insurance industry, capturing 30% to 50% of its $15 billion to $30 billion total addressable market and generating margins above 40%.

BSD Analysis:
Baron sees Guidewire as the dominant software platform for the global property & casualty insurance industry following its successful cloud transition. The company's shift from infrastructure investment to product development should accelerate cross-selling opportunities within its sticky customer base and drive annual recurring revenue growth. Subscription gross margins expanded by approximately 1,050 basis points in the most recent quarter, demonstrating the scalability of the cloud model. Management targets capturing 30-50% of the $15-30 billion total addressable market with margins exceeding 40%. The completion of the multi-year cloud transition positions Guidewire to benefit from new customer wins and existing customer migrations to InsuranceSuite Cloud. The company's mission-critical software creates high switching costs and recurring revenue visibility.

Pitch Summary:
IBKR, a global automated electronic broker, increased 10.0% in the quarter and helped performance by 40 bps. The company continues to take market share due to its strong automation and ability to operate in international markets with little competition. This is allowing the company to grow its new accounts, which have accelerated recently to almost 30% this year. The company has industry-leading margins of over 70% generating robust cash flow. It has significant cash on its balance sheet and is looking to deploy it towards acquisitions and continued growth. We continue to believe the company's focus on the most sophisticated investors who trade a range of assets across different global markets is a key differentiating factor. The vast array of markets it serves and strong growth from countries outside the U.S. where low-cost brokerage is not well penetrated are key competitive advantages for the company. This allows the company to offer its clients the lowest cost trading due to its high level of automation, while also offering highly competitive rates on margin loans and paying its customers attractive yields on their uninvested cash balances. More than 80% of IBKR's clients are non-U.S. citizens, and more than 80% of their investments are in U.S. stocks. The company has little direct competition serving this clientele. IBKR continues to hire software and computer engineers with a focus on automating many of the processes that competitors rely on employees to perform. With its low-priced offerings and leading range of capabilities, we believe IBKR is well positioned to continue its rapid pace of account growth from just under three million clients today. The company's focus on automation should enable it to continue to be a low-priced provider while earning best-in-class margins, which we believe should lead to double-digit revenue and earnings growth.

BSD Analysis:
Baron views Interactive Brokers as a dominant force in global electronic brokerage with significant competitive moats. The company's 30% new account growth demonstrates strong market share gains, particularly in underserved international markets where 80% of clients are non-U.S. citizens investing primarily in U.S. stocks. IBKR's industry-leading 70%+ margins reflect its automation advantage and operational efficiency compared to traditional brokers. The company's focus on sophisticated investors across multiple global markets creates a defensible niche with limited direct competition. Strong cash generation and balance sheet position IBKR for strategic acquisitions and continued technology investments. Management's commitment to automation should sustain the company's low-cost advantage while maintaining premium margins, supporting double-digit revenue and earnings growth.

Pitch Summary:
Tesla increased 12.6% in the quarter, adding 98 bps to performance. The company designs, manufactures, and sells electric vehicles, related software and components, and solar and energy storage products. The stock increased as the core automotive segment accelerated sequentially. We believe lower interest rates will help sell more cars and halt the company's continuous lowering of prices on its cars. In addition, the company's energy storage business continues to grow sequentially. It almost doubled in the second quarter from first quarter levels. In time, business should add significantly to revenue and gross margins and help offset any margin degradation from its auto business. Tesla continues to generate sufficient gross profit to support a robust product development plan. The refreshed Model 3 and Y are also generating strong demand with improving unit-level economics. Lastly, Tesla should benefit from its eight-year, $10 billion investment in data and compute that will allow AI to "train" cars to drive with autonomous technology. Dojo, an AI "training" compute; autobidder, an automated energy trading platform; the Optimus, a human-like robot; and energy storage, we believe also provide opportunity. We believe Tesla is well positioned for further growth given its strong balance sheet and substantial cash.

BSD Analysis:
Baron maintains strong conviction in Tesla's multi-faceted growth story beyond traditional automotive manufacturing. The fund emphasizes Tesla's rapidly expanding energy storage business, which nearly doubled quarter-over-quarter and should provide higher-margin revenue streams. Management's $10 billion AI investment over eight years positions Tesla as a leader in autonomous driving technology through its Dojo training platform. The refreshed Model 3 and Y vehicles demonstrate improving unit economics while maintaining strong demand. Tesla's diversification into robotics (Optimus), energy trading (Autobidder), and energy storage creates multiple growth vectors. With a strong balance sheet and substantial cash position, Tesla is well-capitalized to execute on its ambitious product roadmap across multiple high-growth markets.

Pitch Summary:
Spotify increased 18.9% in the quarter and helped performance by 98 bps. The company continues to improve its platform adding new products and making it more beneficial for the consumer. This has resulted in an increase in subscribers along with significant pricing power. The company has started to institute more regular price increases, which is accelerating its revenue and margin growth. Further, the company has been able to increase prices without increasing its churn rate. We believe the business should be able to improve gross margins from 26% to between 30% and 35% over time while continuing to add subscribers and generate strong top- and bottom-line growth. This should result in an increase in cash flow. Given strong cash flow conversion rates, we believe the company could initiate a return of capital program in the near future. We believe Spotify's valuation remains attractive despite its recent stock price increase. Founder & CEO, Daniel Eck continues to own a 15% stake in this business.

BSD Analysis:
Baron maintains a bullish stance on Spotify, emphasizing the company's successful pricing power and platform improvements. The fund highlights Spotify's ability to raise prices without increasing churn rates, demonstrating strong customer loyalty and value proposition. Management expects gross margins to expand from 26% to 30-35% over time through pricing optimization and operational efficiency. The company's strong cash flow generation positions it for potential capital returns to shareholders. With founder-CEO Daniel Ek maintaining a 15% ownership stake, management incentives remain aligned with shareholders. Despite recent stock appreciation, Baron views the valuation as attractive given the company's growth trajectory and margin expansion potential.

Pitch Summary:
We initiated an investment in Vulcan Materials Company. Vulcan is the largest producer of construction aggregates in the U.S. and generates approximately 90% of its gross profit from mining, processing, and transporting crushed stone, sand, and gravel (collectively, "aggregates") from its quarries. The balance of its gross profit is derived from strategically located ready-mix concrete and asphalt. Vulcan's products are utilized in infrastructure projects such as roads, highways, and bridges, as well as in residential and non-residential construction. We believe the aggregates industry contains high barriers to entry and strong pricing power. The approval process for a new quarry typically takes 5 to 10 years. This limits new competition and constrains supply, placing companies with existing quarries in an advantaged position. In addition, a high weight-to-price ratio makes transportation expensive, limiting the distance that aggregates can be shipped economically. As a result, aggregates producers have historically enjoyed pricing power. During the past 30 years, aggregate prices have increased, on average, 4% annually. Pricing power has been exceptionally robust during the past several years in response to inflationary cost pressures, and we expect above-trend price growth to continue. We believe the multi-year growth prospects for Vulcan are especially attractive. Infrastructure-related spending, which accounts for approximately 40% of Vulcan's aggregate shipments, is accelerating. It should remain elevated as the Infrastructure and Investment Jobs Act allocates significant sums from the federal government towards new and existing infrastructure projects. Outsized state-level infrastructure spending will also drive demand across the company's footprint. Private construction spending (residential and non-residential) may accelerate over the next few years as well. Residential construction may respond to an acute need for more new homes following a 15-year period of underbuilding relative to the demographic needs of our country. Non-residential spending may accelerate to meet the real estate needs in growing areas such as logistics warehouses, data centers, and manufacturing.

BSD Analysis:
Baron initiates a bullish position in Vulcan Materials, emphasizing the company's dominant market position as the largest U.S. construction aggregates producer. The manager highlights the industry's exceptional barriers to entry, with 5-10 year quarry approval processes creating significant competitive moats and supply constraints. The high weight-to-price ratio of aggregates creates natural geographic monopolies, supporting strong pricing power evidenced by 30-year average annual price increases of 4%. Baron expects above-trend pricing to continue given recent inflationary pressures and supply-demand dynamics. The investment thesis centers on multi-year growth catalysts, particularly the Infrastructure and Investment Jobs Act driving federal infrastructure spending, which represents 40% of Vulcan's shipments. Additional tailwinds include state-level infrastructure investments and potential acceleration in private construction. The manager identifies a 15-year residential underbuilding cycle that should drive housing construction demand, while non-residential growth in logistics, data centers, and manufacturing provides further upside. The combination of pricing power, market leadership, and infrastructure-driven demand creates an attractive long-term investment opportunity.

Pitch Summary:
The Fund participated in the recent multibillion dollar Series B fundraising round for X.AI Corp. Founded by Elon Musk, we believe X.AI is a promising investment opportunity in the rapidly evolving landscape of AI companies. X.AI's ambitious goal is to develop AI "to understand the true nature of the universe." X.AI's growth potential is underpinned by the increasing demand for credible AI solutions and continuous product improvements. The company intends to revolutionize the market for AI models and applications. In the short period since its inception, X.AI launched its first AI model and product, Grok, which has shown impressive results compared with more established AI models. We believe this early demonstration, coupled with the ongoing development of two newer versions, showcases the company's ability to drive rapid innovation cycles. X.AI's new funding is expected to allow the company to purchase significant computational power and attract top engineering talent. We believe that the company's leadership is a significant asset. Musk's track record in AI development spans many years, including co-founding OpenAI, developing related software and hardware capabilities at Tesla, and deploying AI to improve X.com's (formerly Twitter) functionality. Across his other businesses, Musk has demonstrated abilities as a capable leader who drives tremendous innovation in complex environments. The founding management team includes key figures from OpenAI, Google's DeepMind, Tesla, Microsoft, and Meta, bringing extensive and relevant experience. We believe that X.AI's competitive position is enhanced by its access to differentiated data, computational power, software and hardware integration, and its distribution opportunities. The company has unique access to the data of X.com, which represents one of the largest and fastest-growing repositories of real time, multimodal, diverse, human to human interaction data sets. Nearly 600 million people use X.com's application each month, and its users spend 362 billion seconds and watch more than 8 billion videos each day on the platform. We believe that X.AI will expand its access to additional unique data assets. On the computational front, X.AI is making bold moves and advancing rapidly. The company plans to deploy one of the world's largest, densest computing clusters, boasting 100,000 GPUs. These dense computing centers, though complex, can drive significant improvements in compute utilization and cost efficiencies. Musk recently noted that "it will be the most powerful training cluster in the world by a large margin." In just a few months, the company identified a location, secured power allocation, and started to deploy hardware with a goal to start utilizing this data center before the end of 2024. Considering most new data center development cycles take two to three years, we believe this is a tremendous achievement by the company. By bringing more efficient computing resources online faster than its competitors, we believe X.AI can build and improve its products faster than others. The company's first data center will be followed by additional large data centers with the goal to deploy 300,000 even stronger GPUs by summer of 2025. The founding team's experience in chip development, related software, thermal, and energy management is expected to allow further hardware innovation. We believe that the integration of hardware and software expertise provides a unique advantage in the AI space, where computational efficiency is crucial. X.AI also has substantial distribution opportunities. The company's collaboration with X.com provides immediate access to hundreds of millions of users, offering a valuable user base early in its development. Additionally, X.AI is well positioned to explore more traditional distribution channels, including business-to-business integrations and dedicated standalone consumer solutions. Although these remain early days in the development of artificial intelligence, we are confident in the disruptive potential and value creation opportunities that lie ahead. We believe that X.AI's focused strategy, formidable talent, and innovative approach position it to become a significant player in shaping the future of AI.

BSD Analysis:
Baron presents an exceptionally bullish case for X.AI Corp., emphasizing the company's unique positioning in the rapidly evolving AI landscape. The manager highlights Elon Musk's proven track record across multiple AI-adjacent ventures and the world-class founding team assembled from leading AI companies. X.AI's competitive advantages include exclusive access to X.com's massive real-time data repository with 600 million monthly users, providing unparalleled training data for AI models. The company's aggressive infrastructure buildout, including plans for 100,000 GPU clusters operational by end-2024 and 300,000 GPUs by 2025, demonstrates exceptional execution speed compared to typical 2-3 year data center cycles. Baron views the integration of hardware and software expertise as a crucial differentiator in the AI space where computational efficiency drives competitive advantage. The immediate distribution access through X.com's platform provides a significant go-to-market advantage for AI products and services. Despite acknowledging the early-stage nature of the investment, Baron expresses strong confidence in X.AI's disruptive potential and value creation opportunities in the transformative AI market.

Pitch Summary:
Fair Isaac Corporation (FICO) is a data and analytics company focused on predicting consumer behavior. It is probably best known for its FICO score, which is widely used to assess consumers' credit worthiness. Shares increased on reported solid second fiscal quarter 2024 earnings results and increased fiscal year 2024 guidance. The company also hosted its annual user conference in April where CEO Will Lansing expressed confidence that the business can perform well across different macroeconomic backdrops and optimism about the magnitude of the opportunity in its software business. There are some near-term areas of uncertainty, most notably the impact of interest rates on its FICO scores business and a potential Consumer Financial Protection Bureau investigation into Scores pricing. Long term, we believe FICO will be a steady earnings compounder, which should drive solid returns for the stock over a multi-year period.

BSD Analysis:
Baron maintains a bullish long-term view on Fair Isaac Corporation despite acknowledging near-term uncertainties. The manager highlights solid Q2 2024 earnings and raised guidance as evidence of the company's fundamental strength. CEO Will Lansing's confidence in the business model's resilience across different economic environments reinforces the defensive characteristics of FICO's franchise. The manager acknowledges regulatory risks from the CFPB investigation and interest rate sensitivity but views these as temporary headwinds. Baron's investment thesis centers on FICO's position as a steady earnings compounder with durable competitive advantages in credit scoring and analytics. The company's software business expansion provides additional growth opportunities beyond the core FICO score franchise. The manager expects the combination of recurring revenue streams and market-leading analytics capabilities to generate solid multi-year returns.

Pitch Summary:
Guidewire Software, Inc. is a software vendor to the P&C insurance sector, and its shares contributed to quarterly performance. After a multi-year transition period, we believe the company's transition from an on-premise software provider to a cloud-based solution is substantially complete. We believe that cloud will be Guidewire's sole path forward, with annual recurring revenue (ARR) benefiting from new customer wins and migrations of the existing customer base to the company's InsuranceSuite Cloud. We also expect the company to shift R&D resources from infrastructure investment to product development, which will help to drive cross sales into its sticky installed base and potentially accelerate ARR over time. We are also encouraged by Guidewire's subscription gross margin expansion, which improved by more than 1,000 basis points in its most recently reported quarter. We believe that Guidewire will be the critical software vendor for the global P&C insurance industry, eventually capturing 30% to 50% of its $15 billion to $30 billion total addressable market and generating margins above 40%.

BSD Analysis:
Baron presents a compelling bull case for Guidewire Software, highlighting the successful completion of the company's multi-year cloud transformation. The manager emphasizes the strategic shift from infrastructure investment to product development, which should accelerate cross-selling opportunities and ARR growth. The dramatic 1,000+ basis point improvement in subscription gross margins demonstrates strong operational leverage and pricing power. Baron's conviction is anchored in Guidewire's dominant market position in the P&C insurance software space, with the potential to capture 30-50% of a $15-30 billion TAM. The sticky nature of the installed customer base provides revenue visibility and expansion opportunities. The manager expects margins to exceed 40% as the cloud transition benefits materialize, positioning Guidewire as the critical software infrastructure for the global P&C insurance industry.

Pitch Summary:
Verisk Analytics, Inc. is a leading provider of proprietary data and analytics to the property and casualty (P&C) insurance market. Its shares contributed to performance, as the company reported strong first quarter 2024 earnings, especially relative to investors' muted expectations. The CEO expressed optimism about the state of the P&C insurance end-market and Verisk's ability to continue to increase its pricing and expand its product offerings. We maintain conviction in the company's competitive positioning, as well as its prospects for long-term revenue growth, margin expansion, and capital deployment opportunities.

BSD Analysis:
Baron maintains a bullish stance on Verisk Analytics, emphasizing the company's dominant position in the P&C insurance data analytics market. The manager highlights strong Q1 2024 earnings that exceeded muted investor expectations, demonstrating the company's resilience and execution capabilities. Management's optimism about the P&C insurance end-market provides a favorable backdrop for continued growth. The fund manager specifically notes Verisk's pricing power and ability to expand product offerings, which should drive revenue growth and margin expansion. The company's proprietary data moats and analytics capabilities create significant competitive advantages in the insurance technology space. Baron's conviction in the long-term investment thesis remains strong, focusing on revenue growth, margin expansion, and effective capital deployment as key value drivers.

Pitch Summary:
During the quarter, we also increased exposure to our digitization theme by initiating a position in ASPEED Technology Inc., a Taiwanese semiconductor design company and the dominant global supplier of Baseboard Management Controllers (BMC), a mission-critical chip used to remotely monitor and manage the key components in a server, such as the processor, memory, and power supply. We expect the company to maintain a 70%-plus market share in BMCs, given its superior technology, scale advantage, and strong relationships with key Taiwanese server manufacturers and U.S. hyperscale customers. AI servers have significantly higher BMC content than traditional servers, and we expect surging demand for AI servers to drive a dramatic acceleration in demand for BMCs. ASPEED's growth will be further boosted by the transition to its new-generation BMC, which is priced at a significant premium, reflecting major advancements in performance and functionality. We are also optimistic that the company will leverage its customer relationships and strong design capabilities to successfully expand into new products, including a Platform Firmware Resilience chip which prevents malware attacks. In our view, ASPEED is uniquely positioned as a long-term AI beneficiary, and we expect the company to maintain industry-leading top-line growth and profit margins over the next five years.

BSD Analysis:
Baron views ASPEED as a dominant AI infrastructure beneficiary with a commanding market position in server management chips. The manager emphasizes ASPEED's 70%+ market share in Baseboard Management Controllers (BMCs), supported by superior technology, scale advantages, and strong relationships with Taiwanese server manufacturers and U.S. hyperscale customers. The investment thesis centers on AI servers requiring significantly higher BMC content than traditional servers, creating dramatic demand acceleration. Baron expects growth to be amplified by ASPEED's transition to next-generation BMCs priced at significant premiums due to enhanced performance and functionality. The fund sees expansion opportunities into new products like Platform Firmware Resilience chips for malware protection, leveraging existing customer relationships and design capabilities. Management projects industry-leading top-line growth and profit margins over five years, positioning ASPEED as a unique long-term AI infrastructure beneficiary.

Pitch Summary:
WEG, a leading Brazilian industrial conglomerate, is one of the world's largest manufacturers of industrial electric motors and related equipment. Compared to most global peers, WEG has a vertically integrated business model with large scale manufacturing facilities. This, in our view, is a key competitive advantage, creating cost efficiency, product customization, and on-time customer deliveries. WEG has a strong track record in generating high teens compounded revenue growth over past decades, while maintaining high double-digit return on invested capital and EBITDA margins. Sales should continue to benefit from significant market share gains globally in electric motors, drives, and gear boxes, in addition to the megatrend of greater energy efficiency. WEG also has a strong presence in the energy generation, transmission, and distribution segment, where it offers solutions from wind turbines, solar, energy storage, to EV charging stations and benefits from rising penetration of renewable energy and e-mobility. Finally, we see an emerging opportunity in the power transformer and substation markets, particularly in North America, where WEG should capitalize on recent investments in production capacity in the U.S. and Mexico.

BSD Analysis:
Baron views WEG as a vertically integrated industrial leader positioned to benefit from energy efficiency and renewable energy megatrends. The manager emphasizes WEG's competitive advantages from vertical integration, including cost efficiency, product customization capabilities, and reliable delivery performance. The company has demonstrated strong historical performance with high-teens revenue growth while maintaining high double-digit ROIC and EBITDA margins. Baron expects continued market share gains in electric motors, drives, and gearboxes, supported by global energy efficiency trends. The fund highlights WEG's diversified energy solutions portfolio spanning wind turbines, solar, energy storage, and EV charging infrastructure, positioning it to benefit from renewable energy and e-mobility adoption. Management sees emerging opportunities in North American power transformer and substation markets, leveraging recent U.S. and Mexico production capacity investments to capture infrastructure modernization demand.

Pitch Summary:
SRF is an Indian multi-national that manufactures specialty chemicals, refrigerant gases, packaging film, and technical textiles. The company serves various end markets, including automotive, agrochemicals, pharmaceuticals, air conditioning (AC) & refrigeration, and fast-moving consumer goods. In our view, SRF's key competitive advantage is its R&D/innovation capabilities. The company invests about 3% of its specialty chemical revenue in R&D, the highest among peers. SRF is also the leader in R-32 manufacturing in India. R-32 is currently the most efficient refrigerant for ACs and has low global warming potential (GWP). We view SRF as a key beneficiary of global customers phasing out of high GWP refrigerants to lower their carbon footprint and greenhouse gas emissions. With planned capex investment over the medium term, we believe SRF is well positioned to scale up its specialty chemicals business and deliver mid-teens earnings growth over the next three to five years.

BSD Analysis:
Baron views SRF as a specialty chemicals leader positioned to benefit from environmental regulations and R&D innovation. The manager emphasizes SRF's diversified end-market exposure across automotive, pharmaceuticals, agrochemicals, and consumer goods, providing stability and growth opportunities. The investment thesis centers on the company's superior R&D capabilities, investing 3% of specialty chemical revenue in innovation—the highest among peers. Baron highlights SRF's leadership in R-32 refrigerant manufacturing, which offers the most efficient cooling with low global warming potential. The fund expects SRF to benefit significantly from global customers transitioning away from high-GWP refrigerants to reduce carbon footprints. With planned medium-term capex investments, management projects mid-teens earnings growth over 3-5 years as SRF scales its specialty chemicals business and capitalizes on environmental regulatory tailwinds.

Pitch Summary:
Cummins India, a subsidiary of U.S. based Cummins Inc., is a leading power generation engine manufacturer in India. The company is a dominant player in power generators, with over 50% market share in the highly profitable medium and high horsepower ranges. The company also has a distribution and aftermarket vertical along with an export division that caters to regions including North America, Europe, Middle East, and Africa. In our view, the company's key competitive advantages include best-in-class technology and product quality, wide product range across categories, high penetration with channel partners, and leading aftermarket services. We believe Cummins India is well positioned to benefit from the rising demand for backup power supply in India, driven by higher capital expenditure by the government and private sector companies in segments such as infrastructure and manufacturing. In addition, Cummins India's dominance in the high horsepower range positions the company in new growth verticals such as data centers. We expect the company to generate mid-teens EBITDA growth over the next three to five years.

BSD Analysis:
Baron views Cummins India as a dominant power generation equipment leader well-positioned for India's infrastructure growth. The manager highlights the company's commanding 50%+ market share in profitable medium and high horsepower generator segments, supported by best-in-class technology and comprehensive distribution networks. The investment thesis centers on rising backup power demand driven by increased government and private sector capital expenditure in infrastructure and manufacturing. Baron emphasizes Cummins India's competitive advantages including superior product quality, wide product range, strong channel partnerships, and leading aftermarket services. The fund sees emerging opportunities in new growth verticals like data centers, leveraging the company's high horsepower expertise. Management projects mid-teens EBITDA growth over 3-5 years, supported by India's economic expansion and the company's market-leading position in critical power infrastructure.

Pitch Summary:
Power Grid is a leading power utilities company in India, controlling approximately 85% of the country's inter-state power transmission capacity. Being majority owned by the Government of India, the company is deemed a sovereign entity, which serves as a competitive moat from a cost and access to capital perspective. In our view, given India's robust economic growth and accelerating industrial capacity expansion, significant investment in power generation and transmission infrastructure will be required, creating a multi-year growth opportunity for Power Grid. Additionally, as India targets to achieve 50% of electricity generation capacity through non-fossil fuel sources by 2030, Power Grid will be a key enabler of the country's power transition toward renewable energy. We expect the company to deliver low-teens total shareholder returns over the next three to five years alongside an attractive dividend yield.

BSD Analysis:
Baron views Power Grid Corporation as a strategic infrastructure play benefiting from India's economic growth and renewable energy transition. The manager emphasizes the company's dominant 85% market share in inter-state power transmission and its sovereign backing providing competitive advantages in capital access and costs. The investment thesis is anchored on India's robust economic growth driving significant infrastructure investment needs and accelerating industrial capacity expansion. Baron highlights Power Grid's critical role in India's renewable energy transition, with the country targeting 50% non-fossil fuel electricity generation by 2030. The fund expects multi-year growth opportunities from both traditional grid expansion and renewable energy integration requirements. Management projects low-teens total shareholder returns over 3-5 years with attractive dividend yields, supported by the company's monopolistic position and essential infrastructure role.

Pitch Summary:
HD Korea Shipbuilding & Offshore Engineering Co., Ltd. is the holding company of Hyundai Heavy, the largest global shipbuilder based on orderbook size and the global leader in high-end vessels including liquified natural gas (LNG)-powered ships. Shares contributed on strong quarterly results at subsidiary Hyundai Samho, which delivered better-than-expected margins on higher pricing. In addition, year-to-date newbuild ship order demand and pricing for the group was better than expected. We retain conviction. Korean shipbuilders have an oligopoly in LNG carrier shipbuilding, LNG dual-fueled container ships, and tankers. The tightening regulation on carbon emission, which will be fully adopted by the International Maritime Organization (IMO) by 2030, should drive higher demand for LNG dual-fueled ships as well as carbon-free ammonia-fueled ships. We expect a structural shortage of compliant ships to emerge as the IMO deadline nears, which should benefit HD Korea Shipbuilding given its leading position.

BSD Analysis:
Baron maintains strong conviction in HD Korea Shipbuilding as a beneficiary of environmental regulations and LNG shipping demand. The manager highlights the company's dominant market position as the world's largest shipbuilder by orderbook and leader in high-end LNG vessels. Recent performance was driven by strong quarterly results from subsidiary Hyundai Samho with better-than-expected margins and pricing, plus robust newbuild order demand. The investment thesis centers on Korean shipbuilders' oligopoly position in LNG carriers and dual-fueled vessels. Baron expects tightening IMO carbon emission regulations by 2030 to create structural demand for compliant ships, driving a supply shortage that benefits HD Korea's leading market position. The fund views the company as well-positioned to capitalize on the maritime industry's transition toward cleaner fuel technologies and stricter environmental standards.