Baron’s Lippert on Secular Growth and Technology

for the second quarter. Back half estimates still a little bit weaker than they were at the beginning of the year. About half. We're looking at about seven percent growth for the second half, But again the trend has been towards beats for the S and P five hundred, and we did a recent note on earning signals for stock prices and what that might mean for equities going forward, And what we're really seeing is a lot of the early

year concerns start to clear up. Right, So the bar was incredibly high for twenty twenty five going into the year, that again has come down considerably, making it a little bit easier for the S and P five hundred to

beat subsequent quarters. The issue, I would say, or at least the risk on the horizon, is the twenty twenty six bar, which is well over ten percent for each of the three quarters that we have clarity on the last time that we've had that was twenty twenty one and twenty eighteen, so one was post tax reform, the other was post COVID recovery. So it's quite unusual to have a ten percent growth backdrop without some kind of

recovery or fiscal policy coming through to help stocks. But the other signs that we're watching that that have been more constructive for socks. Earnings breadth has improved. Cyclical minus defensive sector earnings and revenue better better than cyclicals are looking better than defensives on that end. Revision momentum very positive, and the margin outlook has been improving despite all the

terrorfs that have come down the pipe. So things looking a lot better on the earnings front than they are at the start of twenty five, at least after the liberation to announcement.

even though we're considered to be a growth manager. Why we invest in businesses, not just stocks, and we try to find great businesses run by top entrepreneurs that are simply going to grow for a very very long time. You know, there's the same and the short term, you know, the market is a voting machine, and the long term it's a weighing machine. We effectively believe in that right over the long term, the market will get fat, sorry,

stocks will get fat on revenues and profits. You put them on a scale, you put a reasonable multiple on them, because you know, multiple in the short term is sentiment driven. And if you find companies that can really get fat, they're going to create great value. And if you look over the last you know, let's just call it whatever, forty fifty years, the Internet age. You know, the Googles, the Microsofts, the Apples of the world. They basically just

kept going and going and going. And so we invest in what we call secular growth trends or themes. These are things that are almost undeniable Internet cloud computing. Try to find the companies that have competitive advantages so they're going to take market share among these trends. And just one last point. One of the things we look at we call it second or third acts, you know, second or third s curves or multiple tams. Companies that can do more than one thing, go from a single product

or service company to multiple product services. All come means want to be what's called, you know, a platform company. And you know, maybe the most famous one would be Amazon, which started life as a you know, online bookseller, and we know all the things that Amazon is today including aws, probably its most valuable business.

And when I think about a theme or a trend, it's not dissimilar from a company when you learn in business school. People can't maybe can't see the podcast, but you know, things follow an S curve and you want things to inflect, you know, upwards at some point, and so we spend a lot of time trying to find, you know, that inflection point. And as I was thinking about our podcast this morning, like we're not timers, so we don't have to exactly get it right. Oftentimes we

maybe a little bit early before the inflection point. Sometimes we're late. However, and if you think about the inflection, that's deep part of the growth of a big trend. Cloud computing can last seriously twenty years. If you miss the beginning, you can still participate in a long time. So we really look at, you know, what's the driver of that trend, what is the market backdrop, what's the traction that it's getting, you know, what's the size of

that opportunity. You know even what it will take in terms of human behavior, whether it's enterprise or consumer behavior to get adoption, and we look for what I call proof points, actual evidence that something you know, is getting legs. And so you know, for example, during COVID, there were lots of themes that people got all excited about, you know that some of them never really picked up and amounted into anything, but we we try to invest in

the ones that are you know, believe are real. I'm sure we'll talk about AI and of course, you know, we're now not even three years into it, we're obviously convinced that is a real major theme and will impact you know, every industry in the world for the next at least twenty years will have an AI two dot oh at some point of course. So you know, you.

a big move on NFTs and things like that. Even when we think about crypto trading, you know, we looked at some companies that were going public, and while we were definitely believers that crypto trading, for example, you know, would expand across the market and you know, lots of self directed investors would do crypto, we didn't know that

any one particular company had a competitive advantage. We looked at trading historically and other than like the CME for example, that would have a future that was you know, really developed proprietary to them. You know, everybody had trading, so we looked at things like that. But again there's no

easy way. It is honestly just doing the work. And the work for us are talking to the companies involved that we're looking at that are you know, the leader's pioneers for example, of a product or service, talking to their competitive set, talking to customers. Of course, you can do lots of polling and there's lots of data when

it comes to a consumer. With enterprises, again you can go out and talk to them and again it's just it's candidly looking for real proof points of adoption people actually using a product or service and truly getting value out of it, and we try to measure that and so again I'm at a high level that but that is what we try to do.

asked what that means. It is effectively player coach. Right, I'm in the field, on the field with the analysts, but I'm a little you know, a little bit coaching to make sure we're focused on the right things. Even focused on the right things right now. Is not just the right answers, of course, you want to get the right answers, but the process of making sure you're asking the right questions all of the things That means for

our research. I'm trying to make sure collaboration is not just a word that we put on a slide deck, but actually happens in practice. Every firm says collaboration, you have to actually really really do it. So all of these things are just the research. And so when it comes to a given sector or industry, for example, it's rare that we're surprised because we have it quote unquote

mapped out. That's my terminology. So we'll know the public companies, for example, in software, we'll know the small, medium sized, and large cap companies. We don't always think of them in terms of market cap, but we think of them what I call the development curve of how developed they are as a company. Are they emerging company, are they approven company? Are they a prospect or they im mature company. We'll then divide up a given sector or industry by

different verticals and we have it mapped out. And we also do a lot of work. Even though we don't do a lot of private investing, we do a lot of work meeting the private companies. Two reasons one to get much smarter because those companies tend to be the disruptors of the public companies. So to get much smarter on that, we just had to trip out to the West Coast and we met with lots and lots of

private companies. I can tell you more about that then, of course, to meet these companies before they go public, so that we know them really well when they become a public company, and hopefully that we will get, you know, because of the management direction, not because of a sell side firm, a good allocation in the company that we really want to invest in, because we've known them for years and they see that we at Baron have made

the investment. And our reputation, of course when it comes to private companies and IPOs is that we are long term investors. So management teams would like Baron to be involved because we're not going to you know, trade their stock on a pop for example.

firm is well known for our investment in Tesla. My particular portfolio first invested in Tesla in twenty twelve, so we were very early on and of course even today there's debate about, you know, the adoption and what the penetration will be of electric vehicles. Back then, could you imagine there was much more debate. So we were able to enter at that stage of course, position our investment

in an appropriate size. But we were early and if you really think about and you look at the chart of Tesla and Ron Barren, my boss, has talked about this a lot on TV. We owned the stock for a lot of I owned it from twenty twelve to twenty fourteen and got a triple and then the stock went flat for a number of years before it inflected up again, and so it was long term investors again running a portfolio, we can have some stocks that go flat.

Another company that we were early on in frankly Envidio, we invested in my portfolio believe it was twenty seventeen or twenty eighteen. In Nvidia, we did not invest because it was a you know, a gaming chip company. We were investing against the AI m L back then machine learning opportunity. I laughed because we were wrong. If you look at our initial model and we thought the you know,

AI penetration would be for Nvidia. I mean, we were ordered of magnitudes too low, and Nvidia just went like this for a long long time before the jet cheap PT inflection of course made it a great stock, and I think it's the best performing investment in my portfolios history. We had a full day where a team of Baron met with Jensen in twenty eighteen. We talked about AIML the entire time, and to show our investors that we were early in the kind of work that we did.

I put literally put quotes from my notes into one of my quarter letters to show that what we were talking when Jensen Wang in twenty eighteen. Let's be real, four plus years. I think I can't remember a spring or fall, you know, before the chet cheap pt moment of you know, November twenty two.

is going to do that couldn't be completely wrong. So I'm definitely not a timer. When a stock is not working, of course, the market is telling you something. We try to understand what the market is telling us, and we try to test that through our research. If the market is you know, simply myopic or short term, that is one thing, and we could wait. If the market, you know,

is telling us. And by telling us, I mean doing that research right, understanding why a stock is underperforming in the market, obviously, talking to the company, all the other things that we do. If it's just adoption is taken a little bit longer, there's been a change in the competitive environment and industry. Some of these things are real, which may cause us to have a different view of

the investment. Less in the investment, sell the investment. And of course if a stock hasn't performed and other stocks have performed well and the long term return opportunity is more attractive, and we can confirm all the things that we have in our investment fieces that will let you know this company again be a company that's going to

get fat ultimately on profits, will increase that investment. And so I won't say that both things have happened in my career, hopefully, you know, I believe we've been more on the right side where stocks haven't worked, and we've been right and they eventually work, but there's no doubt

that there have been times that stocks haven't worked. We drilled down and we ultimately decided to exit that company because you know, when we exit, if you want to ask, it is honestly not because stocks are going against us in the market, because we conclude, based on our own research analysis, that we've made a mistake or there's just literally something better for us to invest in, even though it may not be a mistake, there's just something better,

but it's never because of the trading activity.

So one of the things I've always trying to figure out is when you have exposure to a private company or you know, a structured entity, how do you evaluate those and kind of integrate those into your valuation and risk frameworks when information is obviously not as readily available as a public company.

market that certainly influences our valuation for the committee. However, as investors, we research and value SpaceX exactly the same way that we research and value a public company. And frankly, private companies often give you more information than you are able to get more exposure to management because you don't have some of the same reg fd issues. So we've been investors in SpaceX for many, many years. I wish

I could recall the exact time period. I believe we know the company very very well, just like we might have a model on Tesla or Microsoft or Broadcom or Shopify. Of course, we have a model on SpaceX. It's not marked to market every single day in the market, but we as investors of valuate it, you know, honestly, exactly the same way. Some of the different risks, of course, are liquidity risks. There's no doubt about that, and that will inform maybe the position size we have of the company.

One of the things with a company like SpaceX, we have no intent at Baron to use these secondary markets. But there's you know, there is liquidity in SpaceX today that is a little and that's evolved in the private markets. That's a little bit different than you know, what a

private company might have been ten years ago. But again for all listeners there right now, the way we see the opportunities for SpaceX and certainly their differentiation whether it's in satellite broadband or in the launch business, we intend to be very long term holders of SpaceX.

It's very clear from the announcements of last week we have a number four that's Oracle, and certainly we have what are called neo clouds companies like core Weave, and there's just insatiable demand for power cooling and of course compute to train and run running is what's called inference AI workload. So I think cloud computing has not matured at all, just maybe what you know CPU, you know, central processing unit dominated by the Intel five percent market

share of AMD. That world has changed and we're now in the you know, AI compute, GPU compute. People call them accelerator world. So I think we're in the very early stages of that and demand is literally insatiable. I'll touch on software for a second that you can come back with a follow up. There's been an enormous debate in the market this year, you know, quote unquote is software dead. We did our own piece on that and

all quarterly letters. We wrote a barren insight piece which people can take a look at, and our answer was, first of all, that's not the right question for us, at least because we don't invest in software. We try to invest in, you know, the software winners. Software is obviously facing a major challenge, a major disruption. The future of software is not simply a human being, you know, dropping down, you know, like I'm in my Excel right now,

windows and things and doing something with it. Software is shifting and it was interesting. We met with a CEO last weekend and the way she put it is software is sipping from like humans doing things to just work happening. And often the work will be done by artificial intelligence, will be done by agents in conjunction with human beings. And I think more and more over time, more and more of the work we'll be done by agents by AI, and it will make you know, people that much more productive.

And software has always been a productivity tool. I don't think that will change. But again, we are going through a major inflection. We are going through a major change. Some software companies will quote unquote across the chasm from the SaaS age to the AI age. If you do not do that, you will be disrupted. If you want to follow up, there's lots of things that we could

talk about. What the characteristics might be of a software company that can be successful in the AI age, and I think just to put a touch on it, data is incredibly important, proprietary data or customer data that they could access and understanding basically what's called the context around users and workflows. You know a term that Volunteer has

popularized called ontology. I would say they have ontology, but when we talk to lots of other companies they talk about what they're doing with the data, they talk often about context and that is basically the same thing that they're referring to with intology. I'm not putting down what volunteers doing. They're doing some really interesting stuff, but that is what people are talking about, and software companies have that they have to capitalize on that. If they do not, they will be disrupted.

all year long has been uncertainty. You know, you touched on the tariffs and the tariff's impact and what will happen later in the year and did this you know, was there a pull forward in consumer demand in the middle of the year before taris. We've asked lots and lots of questions on that. You know, we think about all the time. What I call secular tocyclical, you can

call it a ratio. You can't calculate it, but qualitatively you could understand which businesses are more secular and therefore you know their business will be less disrupted by a weak macro. And certainly some great businesses any advertising business you know, Google or meta e commerce businesses Amazon or Shopify, and they're all macro sensitive of course, right consumers have to buy on their platforms, or consumers have to be buying so that advertisers want to want to reach consumers.

So we're well aware of that. We have a lot of data on of course the macro. We know what you know comps are, you know what treat expectations are, and of course we know what valuations are, what in a sense being priced in for these companies. So we are making judgments about in a sense what exposures we want to have, and at our firm, there's no doubt we want to have exposures to get what I call

secular themes. So if you think of a ratio, if we could calculate that ratio, we want to, you know, have as high as secular as cyclical ratios as we

possibly can. And when it comes to cyclical companies like some of the ones I named, we're absolutely investing in the ones that we believe are are clear leaders, you know, with real strong and durable competitive advantages, so that you know, even if there is some macro weakness, usually the strong end up becoming stronger during a macro week week period.

the same. There are certainly, you know, some trends go to market. You know, product or service adoption will happen in a more localized or regional manner, So we will look at that go to market, that penetration, that competitive environment in that way. Right, there are global companies, North America based companies. Obviously it could be Latin America or Asian based companies. So that part of the analysis it

is certainly, you know, quite similar. You know, we may look at particular trends that you know, relate to you know, Latin American for example, to pick up an e commerce, to pick up of you know, I think neobanks are doing better in markets outside of the United States. Why, because our banking system is quite mature. We have investments in some India businesses. And you know, local commerce, for example, is a very big thing, which today in the US

we might experience with door dash. There are Indian players that are doing that, and so these are there's no doubt that there are some localized themes that we look at. You know that one, for example, you know, what i'll call local commerces is one that we're looking at in India.

and I put in my core letters. Things are flashing green and blue right now. Very aware of where evaluations are. Not only do we do particular company valuations, we call them peer group because that's what we started on, but they're industry based and I know exactly where, and everybody in my seat should know that. You know, because the data is available. You know where software companies have traded at over time versus growth rate, versus margins, where cloud

computing companies have traded over time internet companies. So we're quite aware of that. You know, we you can graph all these things, you can look at you know, you know where you are within the range. There's no doubt that there are some, you know, certainly companies that are that are quite expensive. Honestly, we do take that into account. I'm not allowed to name particular trades, but you know,

earlier this year we made a cybersecurity trade. We had a company that was a fantastic winner, but we were able to shift it into you know, that's a little bit less developed, lower market cap company that we also perceived as a winner. And basically, you know, we were trading about ten multiple points for that the company we ended up getting into ended up being acquired, so that was a nice risus. But we're not always making those trades.

And when I think about it, I really don't look at I'm well aware of the one year or two year forward multiple. The question is how much money can we make over the long term? And at Baron we look in four or five year time periods and then we stack them continuously on top of each other. So how much money can I make in a four or five year time period? Basically our goal is to look for a fifteen percent annualized return. I want a little

bit better than that. We know, sometimes I'm going to use my hand that stocks or sometimes you know, if you plot that line, sometimes they're above, sometimes they're below. We also look at downside risk, and downside risk is also often multiple contraction, you know, from something going on, you know with the market. Of course we had that around, you know that, you know, the tax or sorry, tariff

for you know what people call liberation. To hate that term because it didn't feel so liberating to me, but you know, the tariff period, and so all of these things are taken into account in our portfolio management in terms of position sizing, what exposures you want to have in our portfolio. So it's absolutely not ignored. But to be clear to anyone at Barn Capital, you know, we're mostly focused on the long term. We want to invest in companies that we believe with the long term winners

because they have durable competitive advantages. And we will not over emphasize, like you know, a meaningful short term move in the stock price if we think the long term opportunity is still very, very attractive.

rolling at robotaxi. I couldn't get a robotaxi because they they wouldn't let me take when I didn't sign up early enough. Of course, robotics right what Tessa's doing again with Optimists and others are but there's other things. We have a company called Somsara that we have invested in. Their ticker is IoT Internet of Things because they are

trying to bring artificial intelligence to the physical world. So they you know, they're doing with vehicles, vehicle safety, vehicle telematics, but they also have a really strong growth business in all other types of physical assets that they can monitor for location. They're doing tanks for fill rates and all these other things. And they sat on their last conference call and it was in their corely letter like you can't train your models on stuff for the Internet for

what we do, so it's very distinct. So I would say physical AI in all forms, not only autonomous driving and robotics for people are things that people should watch out for. I can name a lot of others. I think AI and healthcare will also be a massive theme as well. I want to put that in there.

all of AI is a bubble. You know, if you've seen the you know, information reports, they're going to have to raise one hundred and fifteen billion over the next I can't remember four or five years. So certainly they're not making the argument that, you know, chat ept is a bubble, but that there are probably other companies that have bubble. I don't dispute that there was some bubble somewhere. I don't know that much is missed today when we

think about artificial intelligence. To be candid, it's gonna affect every area you know, of the economy, and so you know, it's going to be software, it's going to be consumer application, it's going to be the infrastructure, it's going to be the energy, infrastructure, I'm trying to think of one that I think has completely missed today. I think, honestly slower right now is probably the impact that artificial intelligence will have in healthcare. We have a few small investments are

certainly very interesting private companies. It takes a little bit longer in that space because of course, you know, AI is not always you know, perfectly correct right. It's probabilistic versus what's called deterministic. In healthcare, you need to be right. So I think it'll take a little bit longer for adoption, but I think it will. It will really impact healthcare. We have some small investments there in that space, and we're watching it really really carefully.