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ETFs to Watch on Recent Microsoft Strength

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The software giant, Microsoft, has surprised the market yet again. Unlike the last quarter wherein the company surprised the market with an earnings miss, this quarter the company beat estimates on both revenues and earnings.
Microsoft Earnings in Focus
The company reported a 17% year-over-year jump in its fiscal first-quarter 2014 earnings to 62 cents per share, outpacing the Zacks Consensus Estimate by 8 cents, or 14.8%. This was significantly better than the 3.0% average miss in the four preceding quarters.
Though down 6.9% sequentially, revenues rose 15.7% year over year to $18.53 billion, clearly beating our estimates by 4.1%. (Read: Internet ETFs in Focus on Amazon Sales Beat)
Notably, management changed the operating structure beginning this quarter to bring in more transparency. The new reporting structure clearly reflects the fact that Microsoft continues to derive the majority of its profits from its Commercial business (which accounted for nearly 60% of total revenues in the reported quarter), as compared to its Consumer business.
The company’s third-quarter earnings were primarily led by strong sales of its cloud-based software offerings like SQL Server, Lync, SharePoint and Exchange. This was supported by a stellar performance from commercial cloud services, which jumped 103% year-over-year in the quarter (read: 3 Internet ETFs Leading the Tech World Higher).
Moreover, it is worth mentioning that though its Devices and Consumer segment reported a modest growth of 4%, revenues from the ailing Surface segment have started to pick up. Growth in volumes aided by price cuts across its tablets range enabled the company to drive sequential growth in surface revenues.
Additionally, Microsoft’s search engine, Bing, surprised the market with 47% growth in revenues year-over-year. It looks like Bing is beginning to play a significant role in Microsoft's integrated services.
Bright Outlook
In order to boost sales of its Surface products, Microsoft recently launched its next generation of Surface RT tablets – Surface 2 and Surface Pro 2 tablets – although it now prefers to call this low end version Surface (without the RT). Nokia’s Lumia tablet will join the club once the takeover formalities are completed next year (Read: 3 Tech ETFs to Watch on Microsoft-Nokia Deal).
With enhanced processing power, battery life, display and camera resolution, market experts predict that Surface 2 is better positioned to compete with the iPad. Moreover, Surface Pro 2 strives to compete with MacBook Air, together with Lenovo, Samsung, and HP.
With more apps and better distribution in this quarter, things can only improve going forward.
ETFs in Focus
Driven by the revenue and sales beat, MSFT shares have soared around 5.3% till date, post its earnings (See: all the Technology ETFs here).
Below, we have highlighted two ETFs touted to be big movers in the coming days, given Microsoft’s solid performance and strong future growth prospects. Investors should closely monitor the movement in these funds and could catch the opportunity from any surge in the price.
PowerShares Fundamental Pure Large Growth Portfolio (PXLG)
This product tracks the RAFI Fundamental Large Growth Index and holds a small basket of 54 stocks with a relatively smaller asset base of $96 million.
Microsoft is the top company by asset weightings accounting for roughly 8.72%, while Merck & Co. Inc. (MRK) with 5.79% exposure and AAPL with 5.34% occupy the next two spots.
In terms of sectors, the fund is pretty much diversified, with Technology comprising 28.1% of assets, followed by 18.99% Consumer Defensive and 14.05% Energy.
The ETF has gained 4.25% in the past one month and 23% in the year-to-date time frame.

The iShares S&P North American Technology-Software Index Fund (IGV)

This ETF provides exposure to companies specializing in software, holding 60 securities in total. Large caps dominate the holding pattern with more than 50% of asset invested while a very small proportion of the asset base go towards mid caps and small caps

It  manages an asset base of $896.4 million and has a concentrated play in the top ten with total investment of more than 55%.The product has the largest exposure to Microsoft with 8.54% of the total fund assets invested in the stock. Adobe and Oracle are the other two top holdings having exposure of a little under 8%.

The fund charges a fee of 48 basis points annually. The fund delivered a return of 21.6% over a period of one year (see 3 Apple Proof ETFs).

Bottom Line

Better-than-expected results from Microsoft have raised hopes about the company’s future prospects. The company in this era of smartphones and tablets is leveraging its resources well with its next generation surface range products.

Investors might therefore consider the above mentioned ETFs to cash in on the rising trend at Microsoft.

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