Investment Pitches

Pitch Summary:
Finally, Salesforce gained 98.5%, adding 1.1% to the Fund's relative return. Salesforce, the leading provider of customer relationship management software (CRM), executed well on its strategy of increased productivity and profitability. We continue to believe the company has underappreciated opportunities to grow profitably and reward shareholders.

BSD Analysis:
Salesforce delivered exceptional performance with a 98.5% gain, contributing 1.1% to the fund's relative return. The managers highlight successful execution of the company's productivity and profitability strategy, suggesting improved operational efficiency and margin expansion. As the leading CRM provider, Salesforce benefits from strong competitive positioning and recurring revenue characteristics. The fund believes the market underappreciates the company's ability to balance growth with profitability while returning capital to shareholders. This indicates potential for multiple expansion as the market recognizes improved capital allocation discipline. The substantial return validates the managers' thesis about underappreciated value creation opportunities. Salesforce's dominant market position in the mission-critical CRM space provides defensive characteristics and pricing power.

Pitch Summary:
Adyen, a payment company, returned 79.0% and added 1.7% to the Fund's relative return. Like Adobe, we were able to buy Adyen after a significant share price and valuation decline due to concerns with competitive pressures and pricing. We remain confident in the underlying business quality, profitability and premium positioning of the company.

BSD Analysis:
The managers executed a successful contrarian investment in Adyen, purchasing shares after a significant decline driven by competitive and pricing concerns. Their conviction in the company's business quality and premium market positioning was validated with a 79.0% return and 1.7% contribution to relative performance. Adyen operates in the attractive payments processing space with strong secular growth tailwinds from digital commerce adoption. The company's integrated payments platform provides competitive advantages through superior technology and global reach. Despite temporary market concerns about competition, the underlying fundamentals remained strong with high profitability and premium positioning intact. This investment demonstrates the fund's ability to identify temporary dislocations in high-quality growth companies.

Pitch Summary:
Adobe, the leading provider of design software, was the Fund's best performer, with the stock returning 72.6% and contributing 2.0%* to the Fund's relative return this year. When we initiated our position in Adobe, the company was trading at historically low valuation due to regulatory concerns around the acquisition of design competitor, Figma, and AI disruption. These overhangs have now been removed with the termination of the Figma deal and greater market appreciation for Firefly and Adobe's AI opportunity.

BSD Analysis:
The fund managers capitalized on Adobe's temporary valuation discount caused by regulatory uncertainty around the Figma acquisition and AI disruption concerns. Their thesis proved correct as these overhangs were resolved, with the Figma deal termination removing regulatory risk and the market recognizing Adobe's AI capabilities through Firefly. The 72.6% return and 2.0% contribution to relative performance validates their contrarian entry point. Adobe's position as the leading design software provider gives it a strong competitive moat. The successful navigation of AI disruption concerns and transformation into an AI opportunity demonstrates management's strategic execution. This represents a classic value-oriented growth investment where temporary concerns created an attractive entry point for a high-quality franchise.

Pitch Summary:
Detractors for the year included some of our healthcare holdings, which underperformed along with the sector as the excitement for weight loss drugs seemed to siphon a lot of capital away from other parts of the healthcare industry. One example is healthcare solutions provider Centene; another position we initiated earlier this year when it was trading at a below normal 9 times earnings. While the stock is up from purchase, it has underperformed the overall market. Thus far, the company's Medicaid business is performing as expected. Meanwhile, a new management team, led by Sarah London, formerly of United Healthcare, is in its second year of turning around the business. We have been impressed with the initial success the company has shown streamlining its business and improving operating performance and the stock remains a full position.

BSD Analysis:
Sound Shore initiated a position in Centene at an attractive 9x earnings valuation, viewing the healthcare services provider as undervalued due to sector rotation into weight loss drug companies. The investment thesis centers on new management's turnaround efforts under CEO Sarah London, a United Healthcare veteran in her second year of transformation initiatives. Early results from business streamlining and operational improvements have impressed the managers, validating their confidence in the leadership change. The core Medicaid business is performing as expected, providing a stable foundation while management executes strategic improvements. Despite underperforming the broader market due to healthcare sector headwinds, Sound Shore maintains conviction with a full position size. The below-normal valuation multiple at purchase provides downside protection while the operational turnaround creates upside potential. Centene represents a classic value play where temporary sector weakness and management transition created an attractive entry point for patient investors. The company's government-sponsored healthcare focus provides defensive characteristics and steady cash flow generation.

Pitch Summary:
For the year, we had a number of stocks up 50% or more and the list includes a diverse set of industries such as homebuilding, heavy truck manufacturing, and semiconductor capital equipment. We would like to highlight one outstanding contributor for the year, electricity generator and marketer Vistra Corp., a low-cost provider with a healthy balance between generation and retail. Demand for electricity is growing and notably, load peaks are changing as well. As the country brings on more renewables and adjusts to greater demand later in the day due to increased use of electric heat pumps and electric car charging, reliable clean power is at a premium. Vistra is well positioned with diversified fuel sources including solar, natural gas, coal, nuclear and battery power storage facilities, along with a marketing division to manage price volatility. The company will soon be closing its accretive acquisition of merchant power generator, Energy Harbor, and the deal will make Vistra the second largest carbon free, nuclear electricity provider behind Constellation Energy, another portfolio holding. Vistra CEO Jim Burke, leads a veteran utility management team that is committed to transitioning the company's portfolio to a sustainable footprint by closing older fossil fuel plants and increasing the renewables portfolio. They have also been an important voice to advocate for changes that will accelerate the global transition to a clean, renewable energy future, while maintaining adequate near-term supply. Vistra has a strong balance sheet that allows the company to invest in innovation and operational improvements. Additionally, management is using excess cash flow to buy 40% of the outstanding shares over a five year period and they are more than half way through that process. Currently valued at 9 times earnings with a 17% free cash flow yield and a 2.3% dividend, the stock remains a full position.

BSD Analysis:
Sound Shore's bullish thesis on Vistra centers on the company's strategic positioning in the evolving electricity market and exceptional capital allocation. Vistra benefits from growing electricity demand and changing load patterns driven by electrification trends, with diversified generation assets providing operational flexibility. The pending Energy Harbor acquisition will make Vistra the second-largest carbon-free nuclear provider, enhancing its clean energy profile while maintaining reliable baseload capacity. Management's disciplined approach to portfolio transition, closing older fossil fuel plants while expanding renewables, positions the company for long-term sustainability requirements. The aggressive share buyback program, targeting 40% of outstanding shares over five years, demonstrates confidence and creates significant value for remaining shareholders. Trading at attractive valuations of 9x earnings with a 17% free cash flow yield, Vistra offers compelling risk-adjusted returns in the utility sector. The company's strong balance sheet enables continued investment in innovation and operational improvements while supporting the capital return program. CEO Jim Burke's veteran leadership team provides execution confidence during the energy transition.

Pitch Summary:
Value investing often requires patience, and the passing of legendary value investor and Berkshire Hathaway's Vice Chairman, Charlie Munger, reminded us of one of his more insightful quotes…"It's waiting that helps you as an investor and a lot of people just can't stand to wait." Healthcare holding Organon provides a similar scenario today. The stock lagged in the fourth quarter and for 2023 due to concerns about long-term revenue drivers. Non-operational factors (currency, interest rates and separation charges) have masked growth that has exceeded expectations. A spinoff from Merck, Organon has a very steady pharmaceutical business and is investing to grow its women's health franchise. Trading for just 4 times earnings, the company is growing steadily, investing in its research & development pipeline and generating ample cash flow to repay its debt. Despite near-term weakness, we think Organon is an attractive opportunity for patient, long-term investors like Sound Shore.

BSD Analysis:
Sound Shore views Organon as a classic value opportunity requiring patience, trading at an exceptionally low 4x earnings multiple. The manager believes market concerns about long-term revenue drivers are overblown, with non-operational factors like currency headwinds and separation costs masking underlying growth that has exceeded expectations. As a Merck spinoff, Organon inherited a stable pharmaceutical business with established products and is strategically investing in expanding its women's health franchise. The company's financial profile is attractive, generating steady growth while producing ample cash flow for debt reduction and R&D investment. Sound Shore's thesis relies on the market eventually recognizing Organon's intrinsic value as operational improvements become more visible and one-time charges fade. The extreme valuation discount provides significant downside protection while offering substantial upside potential for patient investors. This position exemplifies Sound Shore's value investing philosophy of buying quality businesses at distressed prices during temporary market dislocations.

Pitch Summary:
Long-term holding Capital One was also one of our better performers this quarter. The company boasts a diversified deposits base with about 80% FDIC insured, well above industry average. It is the only major bank 100% in the cloud, which enables better underwriting and quicker response to changes in the environment. This technology also helps reduce operating and fraud cost while freeing up cash flow for reinvestment in marketing to grow products (Venture X card) and build its brand. Periods of stress, like we saw in the banking sector during March, are a reminder of the underwriting acumen and high quality deposits of Capital One. We added to our position after the fallout, knowing that the company's seasoned management team had steered capably through previous cycles. Today, as credit card delinquencies have risen to more normal levels, Capital One is already reporting a slowing in delinquency growth. Conversely, some peers saw prior underwriting missteps begin to surface in 2023. Currently trading at 9 times 2024 consensus earnings and around book value, we remain enthusiastic about the investment.

BSD Analysis:
Sound Shore's bullish case for Capital One emphasizes the bank's technological differentiation and superior risk management capabilities. As the only major bank operating 100% in the cloud, Capital One enjoys competitive advantages in underwriting precision, operational efficiency, and fraud prevention. The company's deposit base quality stands out with 80% FDIC insurance coverage, well above industry averages, providing funding stability during stress periods. Management's seasoned leadership demonstrated resilience during the March banking sector turmoil, with Sound Shore opportunistically adding to their position. The bank's underwriting discipline is evident as credit normalization occurs, with delinquency growth already slowing while competitors face legacy issues from poor underwriting. Trading at attractive valuations of 9x forward earnings and around book value, Capital One offers compelling risk-adjusted returns. The technology platform enables reinvestment in growth products like the Venture X card, supporting long-term market share gains in the competitive credit card space.

Pitch Summary:
Apparel maker PVH led all contributors for the quarter and was one of our best performers for 2023. As we discussed in our letter at the end of last year, the stock sold off in the second quarter of 2022 as it fell on consumer spending concerns and despite the company's core business continuing to grow. We believed that with leading brands such as Tommy Hilfiger and Calvin Klein, along with a strong balance sheet to withstand a sales slowdown, PVH was executing well in a challenging environment. We added to our position at the time and our conviction has been rewarded. This year, margins have improved as the company focused on improving the quality and cost structure of their best selling products. This has allowed earnings to grow against a challenging retail backdrop. PVH's management team has targeted even higher margin improvement which would lead to earnings power (EPS) of more than $18 per share, compared to the current EPS of $11.

BSD Analysis:
Sound Shore's bullish thesis on PVH centers on the company's strong brand portfolio and operational execution during challenging retail conditions. The manager highlights PVH's ownership of premium brands Tommy Hilfiger and Calvin Klein as key competitive advantages, providing pricing power and consumer loyalty. The investment case strengthened as management successfully improved margins through quality enhancement and cost structure optimization, driving earnings growth despite headwinds. With current EPS of $11 and management targeting over $18 per share in earnings power, PVH offers significant upside potential through operational leverage. The company's strong balance sheet provides financial flexibility to weather economic uncertainty while investing in growth initiatives. Sound Shore's conviction was validated by adding to the position during weakness and being rewarded with strong performance. The margin expansion story appears to have meaningful runway, making PVH an attractive value play in the consumer discretionary space.

Pitch Summary:
We recently initiated a position in Structure Therapeutics Inc., a biotechnology company developing a small molecule oral GLP-1 drug used to treat diabetes and obesity. The space is currently dominated by drugs like Ozempic/Wegovy that offer superb blood sugar control for diabetics, and impressively can drive up to 15% weight loss and improve cardiovascular outcomes in both diabetics and non-diabetic obese patients. We estimate that in the U.S. alone, there are about 32 million Type 2 diabetics and an additional 105 million obese patients who would qualify for GLP-1 drugs, and only about 14% of Type 2 diabetics and 1% of obese patients are currently on GLP-1 medication. We see Structure as a leader in the development of oral options that promise lower pricing and open access to these larger markets. Currently, Structure is in Phase 2 trials and is potentially the second oral option to make it to market this decade after Eli Lilly's orforglipron.

BSD Analysis:
The manager presents a compelling bull case for Structure Therapeutics based on the massive addressable market opportunity in oral GLP-1 drugs for diabetes and obesity treatment. The investment thesis highlights the significant market penetration gap with only 14% of Type 2 diabetics and 1% of obese patients currently on GLP-1 medication despite a combined addressable population of 137 million patients in the U.S. alone. Structure's oral formulation represents a potential breakthrough compared to current injectable options like Ozempic/Wegovy, offering the promise of lower pricing and improved accessibility. The manager positions Structure as a leader in oral GLP-1 development with the potential to be the second oral option to reach market this decade after Eli Lilly's orforglipron. The clinical validation of GLP-1 drugs showing up to 15% weight loss and cardiovascular benefits in both diabetic and non-diabetic patients demonstrates the proven efficacy of the mechanism. Structure's Phase 2 positioning suggests meaningful clinical progress while still offering early-stage upside potential. The convergence of massive unmet medical need, proven drug mechanism, and Structure's oral delivery advantage creates a compelling risk-reward profile in the rapidly growing obesity and diabetes treatment market.

Pitch Summary:
Lam Research Corporation is a leading global supplier of wafer fabrication equipment (WFE) and services to the semiconductor industry. Lam's products tend to focus on etch and deposition process steps and its tools are critical in the production of NAND and DRAM memory chips as well as logic devices. While the share of overall WFE spending looks relatively fragmented across the top four to five players in the industry, each of these leading companies tends to have significant share within smaller slices of the industry, creating a stable and favorable industry structure, with share shifts tending to only happen at times of technology transition in the broader industry. We purchased shares of Lam in the quarter as we believe we are at one of those key transition points in the industry that will disproportionately benefit Lam, with a move to gate-all-around transistors in logic creating an increasing need for complex deposition and etch process stops and the emergence of high-bandwidth memory and advanced packaging requiring increasingly complex high-aspect-ratio (i.e., very deep) etches, where Lam has virtually 100% market share. We also believe the market is underestimating the pent-up earnings power in the company as NAND WFE spending recovers in the coming years from one of its worst downcycles ever in 2023.

BSD Analysis:
The manager presents a compelling bull case for Lam Research based on the company's strategic positioning during a critical technology transition in the semiconductor industry. The investment thesis centers on Lam's specialized focus on etch and deposition processes, which are becoming increasingly important as the industry moves to gate-all-around transistors and advanced packaging technologies. The manager highlights Lam's dominant market position with virtually 100% market share in high-aspect-ratio etches, a critical capability for emerging memory and logic technologies. The stable industry structure with leading players holding significant share within specialized niches provides competitive protection, with share shifts typically occurring only during major technology transitions. The timing appears opportunistic as the manager believes we're at one of those key transition points that will disproportionately benefit Lam. The investment case is further supported by expectations of NAND WFE spending recovery from 2023's severe downcycle, creating pent-up earnings power that the market is underestimating. The convergence of multiple technology trends including high-bandwidth memory and advanced packaging should drive sustained demand for Lam's specialized equipment capabilities.

Pitch Summary:
NVIDIA Corporation is a leading semiconductor company that sells chips and software for accelerated computing and gaming and is indisputably recognized as one of the leaders and pioneers of AI. The stock rose in the fourth quarter, finishing the year up over 200% because of the unprecedented demand acceleration for generative AI. CEO Jensen Huang put it straight on the company's November 21 earnings call: "The generative AI era is in full steam and has created the need for a new type of data center, an AI factory, optimized for refining data and training and inference and generating AI. AI factory workloads are different and incremental to legacy data center workloads supporting IT tasks. AI factories run copilots and AI assistants, which are significant software TAM expansion, and are driving significant new investment, expanding the $1 trillion traditional data center infrastructure install base, and powering the AI industrial revolution." NVIDIA is seeing the fruits of its nearly 20-year investment in AI and accelerated computing with data center revenues growing five-fold from $3 billion in 2019 to $15 billion in 2022, and they are expected to at least triple to $45 billion in 2023. This extraordinary top-line growth drove even faster growth in earnings per share, resulting in multiple contraction despite the rapid rise in shares. Over the last year, since AI's "iPhone moment" with the November 2022 public launch of ChatGPT, I've spent a lot of time answering investor questions about AI and our research, analysis, and investments. I've stated publicly that we have been investors in AI for many years and have shared the story of our team's visit with Jensen at NVIDIA's headquarters in September 2018, over five years ago now, and a full four years before most people had ever heard of ChatGPT. While 2023 was a banner year for generative AI, we remain at the early innings of broad adoption. While the opportunity within the data center installed base is already large at roughly $1 trillion, the pace of innovation in AI in general, and generative AI in particular, should drive significant expansion in the addressable market, as generative AI creates a new way for human-computer interaction through natural language, and as companies are better able to utilize their data for decision-making.

BSD Analysis:
The manager presents an exceptionally bullish case for NVIDIA as the definitive leader in the AI revolution, emphasizing the company's 20-year investment in accelerated computing paying off dramatically. The investment thesis centers on NVIDIA's dominant position in AI infrastructure with data center revenues exploding from $3 billion in 2019 to an expected $45 billion in 2023. CEO Jensen Huang's commentary about "AI factories" highlights the fundamental shift from traditional data centers to AI-optimized infrastructure, creating incremental demand beyond legacy workloads. The manager demonstrates deep conviction through early recognition, citing a 2018 visit to NVIDIA headquarters four years before ChatGPT's public launch. Key supporting metrics include 200%+ stock performance and multiple contraction despite rapid share price appreciation, indicating earnings growth outpacing valuation expansion. The thesis emphasizes we're still in early innings of AI adoption with the $1 trillion data center market expanding significantly. NVIDIA's vertically integrated approach across hardware, software, algorithms, and frameworks creates sustainable competitive advantages. The convergence of generative AI enabling natural language human-computer interaction represents a paradigm shift that should drive sustained demand for NVIDIA's accelerated computing platform.

Pitch Summary:
Amazon.com, Inc. is the world's largest retailer and cloud services provider. Shares of Amazon were up in the quarter. Reported results were better than consensus estimates, with a significant beat in North American operating profit and stabilization of AWS cloud computing trends. We believe the AWS cloud division has many years ahead of growth, with recent customer optimizations attenuating and AI emerging as a key driver. On the September quarter earnings call, CEO Andy Jassy declared: "AWS's year-over-year growth rate continued to stabilize...cost optimization…continued to attenuate as more companies transition to deploying net new workloads…[W]e're seeing the pace and volume of closed deals pick up…Top of mind for most companies continues to be generative AI…on AWS's AI work…we're focused on doing what we've always done for customers, taking technology that can transform customer experiences and businesses, but that can be complex and expensive, and democratizing it for customers of all sizes and technical abilities." We also believe Amazon is well positioned in the short-to-medium term to meaningfully improve core North American retail profitability to above pre-pandemic levels, benefiting from its new regionalized fulfillment network and its growing margin-accretive advertising business. Longer term, Amazon has substantially more room to grow in e-commerce, where it has less than 15% penetration of the total addressable market. Amazon also remains one of the clear leaders in the vast and growing cloud infrastructure market, with large opportunities enabling generative AI workloads.

BSD Analysis:
The manager presents a strong bull case for Amazon based on its dual leadership in e-commerce and cloud computing, with AWS stabilization and AI emergence as key catalysts. The investment thesis highlights Amazon's better-than-expected results with significant North American operating profit beats and AWS growth stabilization after a period of customer cost optimization. Management commentary from CEO Andy Jassy indicates accelerating deal flow and generative AI becoming a top priority for customers, positioning AWS for renewed growth. The retail business offers multiple improvement levers including the new regionalized fulfillment network and expanding high-margin advertising revenue. The manager emphasizes Amazon's massive long-term opportunity with less than 15% e-commerce penetration and leadership position in the growing cloud infrastructure market. The convergence of AI workloads with AWS's established infrastructure creates significant upside potential. Amazon's diversified business model across retail, cloud, and advertising provides multiple growth vectors while the company benefits from operational improvements and margin expansion opportunities.

Pitch Summary:
Microsoft Corporation is the world's largest software company. Microsoft was traditionally known for its Windows and Office products, but over the last five years, it has built a $135 billion run-rate cloud business, including its Azure cloud infrastructure service and its Office 365 and Dynamics 365 cloud-delivered applications. The stock contributed to performance because of continued strong operating results, and investor enthusiasm regarding Microsofts's leadership across the secular megatrends of AI and cloud computing. As highlighted above, Morgan Stanley's fourth quarter 2023 CIO Survey confirmed the strength and attractiveness of Microsoft's product portfolio among its customer set: (1) 63% of CIOs expect to use at least one of Microsoft's generative AI products over the next 12 months; (2) "Microsoft widened its lead as the #1 share gainer of IT wallet share as a result of the shift to the cloud on both a 1-year and 3-year view;" (3) Microsoft Azure ranks as the preferred cloud vendor today (with 48% of application workloads today) and is expected to extend its lead over the next three years (to 50% of workloads). For the September quarter, Microsoft again reported better-than-expected financial results, highlighted by Microsoft Cloud growing 23% in constant currency and Azure revenue growing 28% in constant currency, a one-point acceleration from the June quarter, bolstered by ramping AI revenue contributing three points of growth (vs. guidance of two points). December quarter guidance came in well ahead of consensus, driven by continued strong trends across Microsoft Cloud, Azure, and AI. We remain confident that Microsoft is one of the best positioned companies across the overlapping software, cloud computing, and AI landscapes, with its vertically integrated technology stack and broad sales distribution. We believe Microsoft will continue taking share across its business, driving durable, long-term, double-digit growth and best-in-class profitability.

BSD Analysis:
The manager presents a compelling bull case for Microsoft based on its transformation from a traditional software company to a cloud computing and AI leader. The fund highlights Microsoft's impressive $135 billion cloud run-rate and strong market positioning across Azure, Office 365, and AI products. Key supporting evidence includes Morgan Stanley's CIO survey showing 63% of CIOs planning to use Microsoft's generative AI products and Azure's leadership position with 48% of application workloads. Recent financial performance validates the thesis with Microsoft Cloud growing 23% and Azure accelerating to 28% growth, with AI contributing 3 percentage points. The manager emphasizes Microsoft's competitive advantages including its vertically integrated technology stack and broad sales distribution. The investment thesis centers on Microsoft's ability to continue gaining market share across multiple high-growth segments while maintaining best-in-class profitability. The convergence of cloud computing and AI trends positions Microsoft to deliver sustained double-digit growth over the long term.

Pitch Summary:
In the fourth quarter, we initiated a new position in Illumina, Inc., the leader in next-generation DNA sequencing, after the stock fell 45% earlier in the year. Controversy regarding the company's acquisition and disposition of Grail with its cancer diagnostic test is the reason Illumina's share price performed poorly. With Illumina's products, customers perform life science research, run diagnostic tests, treat cancer, and perform noninvasive prenatal testing, among other applications. Customers include leading genomic research centers, academic institutions, government laboratories, and hospitals. Illumina has a $120 billion addressable market opportunity through oncology testing, genetic disease testing, prenatal testing, and scientific research and analysis. Its sales are currently about $4.5 billion. The company generates high margins and cash flow and is currently accelerating its investments in the business. We believe Illumina can grow its revenue at a double-digit rate, and its EBITDA even faster.

BSD Analysis:
Baron initiated a new position in Illumina following a significant 45% decline, viewing the Grail controversy as a temporary distraction from the company's fundamental strengths. The fund manager emphasizes Illumina's leadership position in next-generation DNA sequencing, serving diverse end markets including life science research, diagnostics, cancer treatment, and prenatal testing. The investment thesis centers on a massive $120 billion addressable market opportunity across oncology testing, genetic disease testing, prenatal testing, and scientific research, compared to current sales of approximately $4.5 billion. Baron highlights Illumina's high-margin business model and strong cash flow generation, providing financial flexibility to accelerate business investments. The manager expects double-digit revenue growth with even faster EBITDA expansion, suggesting significant operating leverage in the business model. Illumina's customer base includes leading genomic research centers, academic institutions, government laboratories, and hospitals, providing diversified revenue streams and recurring demand. The company's market-leading technology platform and extensive installed base create competitive advantages and switching costs. Baron views the current valuation as attractive following the Grail-related decline, offering an opportunity to acquire a dominant genomics platform at a discount.

Pitch Summary:
Property and casualty (P&C) insurance software vendor Guidewire was up 21.2% 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 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 approximately 1,600 bps in its most recently reported quarter. We believe that 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 maintains a bullish outlook on Guidewire Software following the successful completion of its multi-year cloud transition. The fund manager emphasizes that cloud will be the primary growth driver going forward, with annual recurring revenue benefiting from new customer acquisitions and existing customer migrations to InsuranceSuite Cloud. The investment thesis centers on multiple margin expansion opportunities as the company shifts R&D resources from infrastructure to product development, enabling cross-selling to its sticky installed base. Baron highlights impressive subscription gross margin expansion of approximately 1,600 basis points in the most recent quarter, demonstrating the scalability of the cloud model. The manager positions Guidewire as the critical software vendor for the global P&C insurance industry, with potential to capture 30-50% of a $15-30 billion total addressable market while generating margins above 40%. The sticky nature of insurance software creates high switching costs and recurring revenue visibility. Guidewire's market-leading position and successful cloud transition provide a platform for sustained growth and margin expansion in a large, underpenetrated market.

Pitch Summary:
Veterinary diagnostics leader IDEXX appreciated 26.9% in the period, contributing 34 bps to performance. While foot traffic to veterinary clinics in the U.S. has been subdued for the past year, IDEXX's excellent execution has enabled the company to continue delivering robust financial results. Traffic to clinics now appears to be rebounding, and we expect this to lead to accelerated revenue growth. We believe IDEXX's competitive trends are outstanding, and we expect new proprietary innovations to contribute to growth in 2024 and beyond. We see increasing evidence that long-term secular trends around pet ownership and pet care spending have been structurally accelerated, which should help support IDEXX's long-term growth rate.

BSD Analysis:
Baron expresses strong conviction in IDEXX Laboratories, highlighting the company's resilient execution despite challenging market conditions. The fund manager emphasizes IDEXX's leadership position in veterinary diagnostics and its ability to deliver robust financial results even during periods of subdued clinic traffic. The investment thesis centers on multiple growth drivers including recovering clinic visitation, proprietary innovation pipeline, and accelerating secular trends in pet ownership and care spending. Baron views the recent rebound in clinic traffic as a catalyst for accelerated revenue growth, suggesting pent-up demand is beginning to normalize. The manager highlights IDEXX's competitive advantages and expects new innovations to drive growth in 2024 and beyond. Most importantly, Baron identifies structural acceleration in long-term pet care trends, providing a durable growth foundation. The company's market-leading position in veterinary diagnostics, combined with increasing pet ownership and spending, creates a compelling long-term investment opportunity. IDEXX's recurring revenue model and pricing power in essential veterinary services provide defensive characteristics with growth upside.

Pitch Summary:
Hotel franchisor Choice declined 7.5% and hurt performance by 19 bps. Choice's proposed hostile takeover of Wyndham Hotels pressured shares because it would increase leverage that could take two to three years to pay down. Regardless, we think the acquisition would benefit Choice and Wyndham since increased scale would enable franchisees to pay lower fees to online travel agencies, increase revenue via a larger loyalty program, and generate higher royalty rates given better revenue management tools. Choice's shares are now trading at historically attractive levels, and we believe the stock is likely to increase if this transaction is not consummated.

BSD Analysis:
Baron views Choice Hotels' recent decline as a buying opportunity, maintaining a bullish stance despite market concerns over the proposed Wyndham acquisition. The fund manager acknowledges that the hostile takeover attempt has pressured shares due to leverage concerns, but emphasizes the strategic benefits of increased scale in the hotel franchising industry. The investment thesis centers on operational synergies that would benefit both companies, including reduced online travel agency fees for franchisees, enhanced loyalty program revenue, and improved royalty rates through better revenue management tools. Baron highlights that Choice's shares are trading at historically attractive valuation levels, suggesting significant upside potential. The manager appears confident in the company's prospects regardless of the acquisition outcome, viewing current weakness as temporary. The asset-light franchising model provides attractive returns on capital with recurring fee-based revenue streams. Choice's strong market position in the mid-scale hotel segment offers defensive characteristics with growth potential as travel demand normalizes.

Pitch Summary:
Our large position in Tesla was down modestly in the period, detracting 28 bps from performance. Tesla designs, manufactures, and sells electric vehicles, related software and components, and solar and energy storage products. The stock detracted as the core automotive segment remained under pressure due to a complex macroeconomic environment, higher interest rates, factory shutdowns, and Tesla's price reductions throughout the year, presenting pressure on the near-term growth and margin profile. Nonetheless, Tesla continued to generate sufficient gross profit to support a robust product development plan that can propel the automotive segment higher over time. Tesla also started to deliver its highly anticipated Cybertruck, its first pickup truck with a tremendous amount of consumer interest and a slew of new technologies within the car and its manufacturing lines. The refreshed Model 3 also seems to be generating strong demand while improving unit-level economics. Lastly, while early, investors now expect Tesla to benefit from its investment in artificial intelligence (AI) through development of autonomous driving technology Dojo (an AI training computer), autobidder (an automated energy trading platform), and humanoid (a human-like robot).

BSD Analysis:
Baron maintains conviction in Tesla despite near-term headwinds from macroeconomic pressures and aggressive pricing strategies. The fund manager acknowledges challenges including higher interest rates, factory disruptions, and margin compression from price cuts, but emphasizes Tesla's ability to generate sufficient gross profits to fund continued innovation. The investment thesis centers on multiple growth drivers beyond traditional automotive sales. The Cybertruck launch represents a significant product expansion with strong consumer demand and advanced manufacturing technologies. The refreshed Model 3 demonstrates Tesla's ability to improve unit economics while maintaining demand. Most importantly, Baron highlights Tesla's artificial intelligence investments as a key differentiator, including autonomous driving technology through Dojo, energy trading via autobidder, and humanoid robotics development. This positions Tesla as more than an automotive company, with potential to monetize AI capabilities across multiple verticals. The manager views current weakness as temporary, with long-term value creation driven by technological leadership and diversified revenue streams.

Pitch Summary:
BioNTech declined 12.2% in the fourth quarter and hurt performance by 20 bps. The company, a leader in the mRNA drug industry, was hurt in the quarter by lower uptake of its mRNA COVID vaccine as fewer people took the new vaccine. This has resulted in lower revenue and cash flow this year, but the company's strong pipeline of new oncology and infectious disease drugs over the next couple of years remains promising. The company is profitable and is generating strong cash flow. At current valuations, 70% of the company's equity value is cash. Accordingly, we believe investors are getting its pipeline for free at current price levels.

BSD Analysis:
Baron maintains a bullish stance on BioNTech despite near-term headwinds from declining COVID vaccine demand. The fund manager emphasizes the company's leadership position in mRNA technology and highlights a robust pipeline of oncology and infectious disease treatments expected to drive growth over the next few years. The investment thesis centers on valuation attractiveness, with management noting that 70% of the company's equity value consists of cash, effectively providing free exposure to the drug pipeline. BioNTech's continued profitability and strong cash generation provide financial stability during the transition period. The manager views current price levels as an opportunity to acquire a leading biotech platform at a significant discount. This contrarian position reflects confidence in the long-term potential of mRNA technology beyond COVID applications. The substantial cash position provides downside protection while the pipeline offers significant upside optionality.

Pitch Summary:
We participated in the initial public offering of Birkenstock Holding plc. Birkenstock is a global footwear company with roots dating back to 1774. Embedded in American culture since the 1960s, the brand is best known for its iconic Arizona and Boston sandals. Although the Birkenstock brand has existed for more than two centuries, the Birkenstock family brought in its first outside management team, led by Oliver Reichert, in 2009. Under new leadership and vision, the business has been transformed from a family-owned, production-oriented company into a professionally managed enterprise committed to growing the Birkenstock brand globally. Following the arrival of new management, Birkenstock revenues have grown at a 20% CAGR from fiscal 2014 to fiscal 2022, when the company generated revenues of €1.2 billion with profitability margins in the mid-30% range. We believe this combination of an iconic brand with high growth and industry-leading profitability makes the Birkenstock brand an attractive asset. Unlike nearly all other footwear brands, Birkenstock manufactures products in-house with over 95% in its German factories. We believe this provides the company with better quality control and less risk in its supply chain. Birkenstock products are sold both direct and through wholesale partners. Wholesale represents roughly 60% of sales through 6,000 selected wholesale partners in approximately 75 countries. The remaining 40% of sales are generated direct-to-consumer, with the vast majority sold through e-commerce. The company has just 45 stores, though they expect to increase that number meaningfully. The American and European markets are most developed, and Asia represents a large, untapped opportunity. Over the medium term, we believe Birkenstock will be able to increase revenue by 15% per year or more, driven by ongoing growth in its core styles, expanded year-round product mix, new stores, and geographic expansion. We also expect Birkenstock to maintain its industry-leading profitability.

BSD Analysis:
Baron Asset Fund participated in Birkenstock's IPO, viewing the company as an attractive investment opportunity with a compelling transformation story. The fund highlights Birkenstock's evolution from a family-owned operation to a professionally managed global enterprise under CEO Oliver Reichert since 2009. The company has demonstrated exceptional growth with a 20% revenue CAGR from 2014-2022, reaching €1.2 billion in sales with impressive mid-30% profit margins. Baron emphasizes Birkenstock's competitive advantages, including its iconic brand recognition, in-house manufacturing capabilities (95% produced in German factories), and diversified sales channels spanning wholesale partnerships and direct-to-consumer operations. The fund sees significant expansion potential, particularly in underpenetrated Asian markets and through retail store growth from the current 45 locations. Baron projects medium-term revenue growth of 15%+ annually, driven by core product expansion, year-round offerings, geographic expansion, and new store openings while maintaining industry-leading profitability margins.