ETFs to Buy as Cloud Boosts Microsoft's Fiscal Q1 Results

After the closing bell on Wednesday, the world's largest software maker Microsoft MSFT delighted investors with better-than-expected fiscal first-quarter 2021 results. It continued a long track of beating earnings estimate and topped the revenue estimate. Microsoft continued to benefit from the work-from-home and learn-at-home trends amid the COVID-19 pandemic (see: all the Technology ETFs here).

Earnings per share came in at $1.82, outpacing the Zacks Consensus Estimate by 29 cents and improving 32% from the year-ago quarter. Investors should note that Microsoft has not missed on quarterly earnings since third-quarter fiscal 2016. The reported quarter also saw revenues rise 12% year over year to $37.15 billion, topping the consensus estimate of $35.67 billion. Growing demand for cloud computing, tablet and video games led to the robust performance.

The company’s strong beat indicates that its market share in cloud computing is expanding while its legacy software products such as Windows and Office are in great demand amid the pandemic. Growth of the flagship Azure computing platform rose 48% in the fiscal first quarter, up slightly from 47% in the fiscal fourth quarter. Sales of Office 365 Commercial and Dynamic 365 climbed 21% and 38%, respectively. Microsoft’s Xbox revenues grew 30% year over year.

The software giant expects a pandemic-era surge in demand for cloud-computing services, videogaming and computers to persist at least through the rest of the year. It expects revenues of $39.5-$40.4 billion for the fiscal second quarter. The mid-point of the range is below the Zacks Consensus Estimate of $40.24 billion.

Microsoft jumped on the gaming corner of the entertainment industry last quarter by announcing the biggest video game deal ever. The world's largest software maker plans to acquire ZeniMax Media Inc., owner of the storied video-game publisher Bethesda Softworks, for $7.5 billion in cash. The proposed deal will bolster Microsoft’s Xbox original games portfolio with a number of the industry’s highest-profile titles including Elder Scrolls, Doom, Fallout, Qyuake, Wolfenstein, Dishonored, Prey and Starfield. It will bring high-profile publishers, including Bethesda Game Studios, id Software, ZeniMax Online Studios, Arkane, MachineGames, Tango Gameworks, Alpha Dog and Roundhouse Studios under the Microsoft gaming roof.

With these additions, Microsoft’s portfolio will expand from 15 to 23 creative studio teams. The deal, which is expected to close in the second half of 2021, is not likely to affect its non-GAAP earnings for this year or the next (read: ETFs to Gain as Microsoft Bets Big on Video Gaming).

Following the earnings announcement, shares of Microsoft fell as much as 2% in after-market hours on weak guidance. Currently, Microsoft carries a Zacks Rank #2 (Buy) and has a Growth Score of B. It falls under a top-ranked Zacks industry (top 46%), which suggests its outperformance in the days ahead.

ETFs in Focus

Investors seeking to invest in this software leader could tap ETFs with a lower level of risk. While there are several ETF options available, we have highlighted six with double-digit exposure to Microsoft that could be compelling choices.

Select Sector SPDR Technology ETF XLK

This most-popular technology ETF follows the Technology Select Sector Index and has $34.6 billion in AUM. The fund charges 13 bps in fees per year from investors and trades in heavy volume of around 11.5 million shares a day, on average. It holds about 73 securities in its basket, with Microsoft occupying the second position at 20.4%. XLK has a Zacks ETF Rank #1 with a Medium risk outlook.

iShares Dow Jones US Technology ETF IYW

This ETF tracks the Dow Jones U.S. Technology Capped Index, giving investors exposure to 157 U.S. electronics, computer software and hardware, and informational technology companies. Of these, Microsoft occupies the second position in the basket with 17.2% of the assets. The fund has AUM of $6.2 billion and charges 43 bps in fees and expenses. Volume is good as it exchanges nearly 171,000 shares a day. It has a Zacks ETF Rank #1 with a Medium risk outlook (read: 5 Top-Ranked Tech ETFs to Buy on Decade's Strongest PC Growth).

Vanguard Information Technology ETF VGT

This fund manages about $37.4 billion in its asset base and provides exposure to 330 technology stocks. It currently tracks the MSCI US Investable Market Information Technology 25/50 Index. Here, MSFT occupies the second position with 16.5% share. The ETF has 0.10% in expense ratio, while volume is solid at nearly 831,000 shares. It has a Zacks ETF Rank #1 with a Medium risk outlook.

MSCI Information Technology Index ETF FTEC

This fund is home to 331 technology stocks with AUM of $4.7 billion. It follows the MSCI USA IMI Information Technology Index. MSFT is the second firm with 16.5% allocation. The ETF has 0.08% in expense ratio, while volume is solid at 452,000 shares a day. It carries a Zacks ETF Rank #1 with a Medium risk outlook (read: ETFs to Gain on Apple's New 5G iPhones, Analysts Optimism).

iShares Global Tech ETF IXN

This product provides exposure to electronics, computer software and hardware, and informational technology companies by tracking the S&P Global 1200 Information Technology Sector Index. Holding 122 stocks in its basket, Microsoft occupies the second spot with 16.3% share. The ETF has amassed $4.4 billion in its asset base but trades in a good volume of 84,000 shares a day on average. Expense ratio is 0.46%.

iShares Evolved U.S. Technology ETF IETC

This is an active ETF, having accumulated $91.6 million in its asset base. It employs data science techniques to provide exposure to 235 technology stocks. Microsoft is the top firm with 14.4% allocation. IETC trades in a light volume of 36,000 shares and charges 18 bps in annual fees.

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Microsoft Corporation (MSFT) : Free Stock Analysis Report
 
Technology Select Sector SPDR ETF (XLK): ETF Research Reports
 
Fidelity MSCI Information Technology Index ETF (FTEC): ETF Research Reports
 
iShares Global Tech ETF (IXN): ETF Research Reports
 
Vanguard Information Technology ETF (VGT): ETF Research Reports
 
iShares U.S. Technology ETF (IYW): ETF Research Reports
 
iShares Evolved U.S. Technology ETF (IETC): ETF Research Reports
 
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