Back to top

Image: Bigstock

ETFs to Buy as Microsoft at Record High on Office 365 Price Hike

Read MoreHide Full Article

Microsoft (MSFT - Free Report) hit a record high of $305.85 on Aug 23. The company’s decision to raise the price of certain Office 365 productivity software subscriptions for businesses next year, is viewed as the reason for the share price gain by some analysts, as quoted on CNBC. The price for one type of subscription, the premium Office 365 E5, is rising by 9% per user per month starting March 1, 2022, while the cost of the more affordable Office 365 E1 will increase by 25%.

Microsoft now has a market cap of $2.47 trillion. This has made the world's largest software maker the second U.S. company to reach this level after the technology giant Apple (AAPL - Free Report) , which reached that level in August 2020, the CNBC article noted. Many analysts noted that the price change has the potential to increase revenues as well as profits. MSFT is up 36.9% this year versus 12.8% gains in Apple.

Commercial subscriptions to Office 365 made up about 18% of Microsoft’s revenues in the fiscal year that ended on June 30, a Goldman Sachs team led by analyst Kash Rangan wrote in a recent note.“We believe the recent announcement highlights the company’s strong competitive positioning and long-term pricing power, helping drive continued ARPU growth through CY22 as well as help drive continued SKU migration to E3 and E5,” the group wrote.

“In our view, price increases could be aimed at driving further migration up to premium E3 and E5 SKUs as the percentage increases are lower for more premium tiers, increasing the relative value proposition of premium SKUs,” Rangan and his colleagues wrote, as quoted on CNBC.  

Solid Fundamentals

Microsoft has seen raising earnings estimate revisions from $1.93 to $2.06 per share for the current quarter over the past 90 days. This represents substantial year-over-year growth of 13.19%. Revenues are expected to grow 18.09%. The stock is cheap, trading at a P/E ratio of 35.37 compared to the industry average of 36.60.

ETFs to Buy

Given this, investors seeking to tap the bullishness in this software leader could consider the following ETFs. These funds have double-digit exposure to Microsoft and could be compelling choices.

Select Sector SPDR Technology ETF (XLK - Free Report)

This most-popular technology ETF follows the Technology Select Sector Index and has $44.74 billion in AUM. The fund charges 12 bps in fees per year from investors. It holds about 74 securities in its basket, with Microsoft occupying the second position at 21.78%. XLK has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

iShares Dow Jones US Technology ETF (IYW - Free Report)

This ETF gives investors exposure to 159 U.S. electronics, computer software and hardware, and informational technology companies. Of these, Microsoft occupies the second position in the basket with 18% of the assets. The fund has AUM of $8.40 billion and charges 43 bps in fees and expenses. It has a Zacks ETF Rank #2 with a Medium risk outlook.

Vanguard Information Technology ETF (VGT - Free Report)

This fund manages about $48.87 billion in its asset base and provides exposure to 358 technology stocks. It currently tracks the MSCI US Investable Market Information Technology 25/50 Index. Here, MSFT occupies the second position with 16.76% share. The ETF has 0.10% in expense ratio. It has a Zacks ETF Rank #2 with a Medium risk outlook.

MSCI Information Technology Index ETF (FTEC - Free Report)

This fund is home to 353 technology stocks with AUM of $6.21 billion. It follows the MSCI USA IMI Information Technology Index. MSFT is the second firm with a 16.74% allocation. The ETF has 0.08% in expense ratio. It carries a Zacks ETF Rank #3 with a Medium risk outlook.

iShares Global Tech ETF (IXN - Free Report)

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 131 stocks in its basket, Microsoft occupies the second spot with 17.1% share. The ETF has amassed $5.74 billion in its asset base. Expense ratio is 0.43%.