Sweta Killa: The software giant – Microsoft (NASDAQ:MSFT) – is becoming an investors’ darling as depicted by the recent surge in its share price. In fact, Microsoft is leading the way in the broad tech space this year leaving behind its rivals Apple (NASDAQ:AAPL), Google (NASDAQ:GOOGL) , Yahoo (NASDAQ:YHOO) and Amazon (NASDAQ:AMZN).
Also, the broad tech sector sell-off since the start of this month on valuation and earnings concerns has had a little impact on the stock, suggesting that MSFT has the potential to continue its strong performance in the coming months.
Microsoft hit a fresh 14-year high early last week and gained in double digits over the past three months thanks to the arrival of the new CEO Satya Nadella in early February and the optimism over the launch of its Office suite for Apple iPad. The recent rally seems encouraging, especially considering the fact that MSFT dropped 40% during the 14-year tenure of the previous CEO Steve Ballmer.
Solid Growth Prospects
With Nadella taking charge as the new CEO, Microsoft appears to be turning around its business with many unfolded opportunities on the way. Nadella is making several changes that would push MSFT into the mobile and cloud computing world from the traditional software space. This has spread optimism on the company’s future growth story.
The company in the tail end of March released a touch version of Office for Apple’s tablet and plans to offer free Windows on phones, tablets and other consumer devices on sub 9-inch screens. These services would drive sales in the coming years.
Additionally, both the company’s hardware and software businesses are growing. The demand for Xbox videogame console, new Surface tablets and Windows Phone devices is rising rapidly in the hardware segment while Azure cloud services and new Office for iPads will continue to boost software sales going forward.
Further, Microsoft is on track to close its $7.2 billion acquisition of Nokia’s mobile phone business this month. The deal would strengthen the competitive position and would add revenue streams and profit opportunities for Microsoft. For example, Microsoft’s gross margin on sale of one Nokia handset would increase from the current $10 to $40 (read: 3 Tech ETFs to Watch on Microsoft-Nokia Deal).
Moreover, many analysts are bullish on the company’s growth outlook and revised their target prices upward, suggesting that the company is on a solid growth trajectory with the new CEO. Microsoft currently has a decent Zacks Rank #3 (Hold), underscoring that it has potential for upside.
Given the bullish outlook and the impressive run up in MSFT share prices, we have highlighted three ETFs with heavy exposure to this software giant for investors seeking to bet on the stock with much lower risk.
iShares Dow Jones US Technology ETF (NYSEARCA:IYW)
This ETF tracks the Dow Jones US Technology Index, giving investors exposure to 143 stocks. The fund has AUM of nearly $3.9 billion while charging 45 bps in fees and expenses. Volume is solid as it exchanges more than 377,000 shares a day.
Microsoft occupies the second position in the basket with 10.21% of assets. The portfolio is evenly split between technology hardware and equipment, and software and computer services segments. The fund added 11.8% over the past three months and has a Zacks ETF Rank of 3 or ‘Hold’ with a High risk outlook.