Baron Capital has capitalized on the recent market dislocation in software-adjacent equities by initiating a position in Axon Enterprise, Inc. (NASDAQ:AXON). The fund manager disclosed the new holding in its second-quarter 2026 investor letter for the Baron SMID Cap ETF, citing a rare opportunity to repurchase the stock at a discount after it was swept up in the broader "AI losers" selloff. The move highlights a divergence between institutional value investing and the current market's intense focus on AI infrastructure winners.

Market Context

The Baron SMID Cap ETF (BCSM) returned 15.62% (NAV) in the second quarter, lagging behind the Russell 2500 Growth Index's 24.02% return. According to MSCI's Barra factor attribution, the underperformance was driven by the fund's underweight positioning in Momentum and Beta factors. The broader market trend during this period favored "AI winners," specifically companies involved in chips, power equipment, and AI data center financing, while pressuring shares of software-oriented companies amid fears that large language models (LLMs) could disrupt traditional software business models.

Analysis

Baron Capital views Axon Enterprise not as a vulnerable software play, but as a market-leading "atoms plus electrons" provider with significant competitive moats. The firm notes that Axon's integration of hardware—such as Tasers, body cameras, and drones—with cloud-based software and AI report generation creates a sticky ecosystem for law enforcement agencies. Baron's thesis suggests that the market's penalization of Axon as part of the "LLM disruption" trade is misplaced. The fund manager recalls Axon as a previous successful investment for the Baron Discovery Fund and believes the current valuation offers potential for more than doubling capital over a five-year horizon.

Key Numbers

- Axon Enterprise closed at $468.42 per share on September 16, 2026.

- AXON shares declined 23.74% over the past month and are down 38.89% over the past year.

- Axon Enterprise has a market capitalization of $38.05 billion.

- The stock has traded within a 52-week range of $339.01 to $792.16.

- Baron SMID Cap ETF's top 10 holdings accounted for 29.3% of total assets in Q2 2026.

- Baron SMID Cap ETF underperformed its benchmark by 840 basis points in Q2 2026.

What to Watch

Traders should monitor Axon's future earnings reports to see if its "atoms plus electrons" model continues to generate robust free cash flow despite the software valuation compression. Additionally, watch for further institutional accumulation in mid-cap software names that Baron Capital identifies as mispriced relative to their fundamental cash flow potential. The sustainability of the "AI winners" trade versus value-oriented rotation will likely dictate AXON's near-term price action.

Axon's business model relies on selling products to governments and law enforcement agencies globally, aiming to "make the bullet obsolete" through non-lethal technologies and digital evidence management. The fund's letter emphasizes that Axon's AI capabilities, particularly in report generation, simplify administrative workloads for officers, enhancing the value proposition of its hardware ecosystem. This fundamental strength contrasts with the market's narrative that AI will erode the moats of traditional software providers.