The AI Divide: Why Baron's Exit from Ibotta Signals a Shift in Tech Investing

The recent departure of the Baron Small Cap Fund from Ibotta (IBTA) has sent ripples through the market, highlighting a stark reality: investors are prioritizing high-growth AI-driven sectors over slower-scaling niche tech stocks—even those with solid fundamentals. This strategic reallocation raises a critical question for investors: Is Ibotta's underperformance a sign of undervaluation, or a harbinger of obsolescence in a world obsessed with AI's next big thing? Let's dissect the data to find out.

The Exit: A Vote Against Niche Tech?
Baron's decision to exit Ibotta, a digital promotions platform for consumer packaged goods (CPG), underscores a broader market shift. While Ibotta reported a 3% year-over-year revenue increase in Q1 2025—$84.6 million—its net income plummeted 94% to just $0.6 million. This stark contrast between top-line growth and bottom-line struggles has left investors questioning whether Ibotta can scale its way into the premium valuations now reserved for AI-driven companies.

Why AI Is Winning the Valuation War
The AI sector's stratospheric multiples reveal why funds like Baron are reallocating:
- LLM Vendors command a staggering 44.1x revenue multiple, fueled by “winner-takes-most” dynamics.
- Search Engines trade at 30.9x revenue, benefiting from low marginal costs and high monetization.
- Even Marketing Tech, a category Ibotta aligns with, averages 16.8x—still higher than Ibotta's current 26.14 P/S ratio.

Ibotta's Adjusted EBITDA margin of 17% (down from 28% in 2024) lags behind Infrastructure's 23.2x average, while its net income as a percentage of revenue (1%) is dwarfed by AI peers. This paints a clear picture: markets now demand razor-thin margins and exponential growth—metrics Ibotta's redemption-driven model struggles to deliver.

The Case for Ibotta: Value in the Undervalued?
Despite the headwinds, Ibotta's fundamentals aren't entirely bleak. Its third-party publisher redemption revenue surged 38% YoY to $48.2 million, and total redeemers grew 37% to 17.1 million. The company's $297.1 million in cash reserves and partnerships with Instacart and DoorDash hint at untapped potential.

Historically, this strategy has delivered an average return of 7.83% over the holding period, though with significant volatility. While the absolute returns are strong, the maximum drawdown of -42.79% and a Sharpe ratio of -0.27 highlight the risks involved, suggesting that while gains can be substantial, the risk-adjusted performance is weak.

Critically, its CPID platform—which promises to double redemption revenue for CPG clients—is still in pilot mode. If scaled effectively, this could position Ibotta as a cost-effective tool for brands in a hyper-competitive CPG market. At a P/E of 12.72, it trades at a discount to its AI peers, making it a compelling “bargain” for investors willing to bet on execution.

The Dilemma: Follow Baron or Bet on Bargains?
Baron's exit reflects a cold calculus: capital flows to sectors with scalability and defensibility. AI's low marginal costs and high growth trajectories fit this mold; Ibotta's reliance on transactional revenue and CPG partnerships does not. Yet, Ibotta's steady user growth and cash reserves suggest it's far from dead.

The decision hinges on time horizon and risk appetite:
- Short-term traders: Follow Baron. AI's momentum is undeniable, and Ibotta's stagnant margins and declining net income make it a laggard in this race.
- Long-term investors: Consider accumulating shares at current valuations. If Ibotta refines its CPID platform and improves margins, its P/S ratio could compress toward AI benchmarks—delivering outsized returns.

Final Verdict: A Fork in the Road
The Baron Small Cap Fund's exit from Ibotta isn't a referendum on the company's viability but a reflection of market priorities. AI's valuation explosion has created a binary choice:
- Growth at any cost: Back LLM vendors and search engines for exponential gains.
- Value at a discount: Bet on Ibotta's undervalued fundamentals and operational turnaround.

For now, the market is choosing growth. But as Ibotta's user base expands and its pilots mature, patient investors may find the next undervalued gem in a sector racing toward the AI horizon. The question remains: Can Ibotta's fundamentals catch up to its valuation—or will it stay stuck in the rearview mirror?

The answer could define tech investing for years to come.