Baron Funds, an investment management company, released its “Baron Asset Fund” first quarter 2025 investor letter. A copy of the letter can be downloaded here. After a strong start to 2025, U.S. equities dropped sharply in late February, with most broad market indexes finishing the quarter down mid- to high single digits. Initially, investors were optimistic about the economy during President Trump’s second term. However, market sentiment shifted due to Trump’s plans for sweeping tariffs on key U.S. trade partners. Additionally, investors tempered their enthusiasm for AI beneficiaries, leading to a sell-off in the Magnificent Seven and other companies within the AI ecosystem. Against this backdrop, Baron Asset Fund had a robust first quarter, returning -2.89% (Institutional Shares) compared to the Russell Midcap Growth Index’s -7.12% return. In addition, please check the fund’s top five holdings to know its best picks in 2025.
In its first-quarter 2025 investor letter, Baron Asset Fund highlighted stocks such as DraftKings Inc. (NASDAQ:DKNG). Headquartered in Boston, Massachusetts, DraftKings Inc. (NASDAQ:DKNG) is a digital sports entertainment and gaming company. The one-month return of DraftKings Inc. (NASDAQ:DKNG) was 2.93%, and its shares lost 2.39% of their value over the last 52 weeks. On June 12, 2025, DraftKings Inc. (NASDAQ:DKNG) stock closed at $37.98 per share, with a market capitalization of $18.849 billion.
Baron Asset Fund stated the following regarding DraftKings Inc. (NASDAQ:DKNG) in its Q1 2025 investor letter:
“DraftKings Inc. (NASDAQ:DKNG) is a dominant player in the domestic online sports betting industry, which is evolving towards a favorable duopoly market structure. Jason Robbins, the company’s CEO and founder, built a culture of technological and marketing innovation to create a top sports betting product while competing against international peers with a large head start in the category. We believe the company is positioned to capitalize on the rapid growth of the U.S. sports betting market. We expect online betting to expand at a 15% to 17% same-state growth rate over the next several years. Approximately half the U.S. population does not have access to sports betting, and future legalization of large states (such as Texas or Florida) could extend the growth runway of the industry into the 2030s.
DraftKings’s financial model is inflecting positively because it has been operating in many states for more than three years. As a result of this maturation, the company has been able to rationalize its customer acquisition costs, which allows for high incremental margins to flow through its income statement. Promotions that are paid to acquire new customers have declined, and the company is recognizing economies of scale from national advertising campaigns. The stock has been under pressure because of concerns about potential state tax rate increases, macroeconomic uncertainty, and possibly unfavorable recent betting results. We believe investors have overestimated the impact of these factors. We expect the company to earn margins in line with management estimates under most tax scenarios. We expect a 30%-plus CAGR in FCF over the next several years as FCF margin expands from low single digits to over 20%. In addition, the company has an excellent balance sheet, and it has recently prioritized returning capital to shareholders through buybacks.”
A woman at a betting table paying out customers who won their sports bets.
DraftKings Inc. (NASDAQ:DKNG) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 70 hedge fund portfolios held DraftKings Inc. (NASDAQ:DKNG) at the end of the first quarter, which was 65 in the previous quarter. DraftKings Inc. (NASDAQ:DKNG) reported $1.409 billion of revenue in the first quarter, representing 20% year-over-year growth. While we acknowledge the potential of DraftKings Inc. (NASDAQ:DKNG) as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVIDIA but that trades at less than 5 times its earnings, check out our report about the undervalued AI stock set for massive gains.
In another article, we covered DraftKings Inc. (NASDAQ:DKNG) and shared the list of stocks on Jim Cramer and Wall Street’s radar. In addition, please check out our hedge fund investor letters Q1 2025 page for more investor letters from hedge funds and other leading investors. While we acknowledge the potential of DKNG as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you’re looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
