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Bet on These ETFs as Microsoft's Shares Slip Despite Q3 Earnings Beat
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Key Takeaways
Microsoft stock fell 4% despite Q3 EPS and revenues beating estimates with double-digit growth.
MSFT's AI run rate topped $37B, up 123% YoY, while Azure demand outpaces capacity.
Heavy AI CapEx pressures cash flow and margins, driving interest in ETF-based exposure.
Shares of cloud giant Microsoft (MSFT - Free Report) slipped 4% on the bourses yesterday, following the company’s better-than-expected third-quarter fiscal 2026 results. The decline was likely triggered by MSFT’s substantial capital expenditure on AI infrastructure, which is weighing on free cash flow, along with investor concerns about the long-term returns on these investments.
This pullback presents an opportune moment for investors who remain optimistic about Microsoft Cloud’s growth prospects, with this business having generated more than $54 billion in revenues during the fiscal third quarter.
However, it is important to note that the company continues to face significant capacity constraints in its data centers and AI infrastructure. For instance, demand for its Azure AI services is outpacing supply, which could limit the expected returns from its substantial AI investments and thereby weigh on its financial performance.
Given this backdrop, investors seeking to capture Microsoft’s long-term leadership in cloud computing and enterprise software, while mitigating the idiosyncratic risk of holding a single stock, may consider exchange-traded funds (ETFs) with significant MSFT exposure. This approach enables participation in Microsoft’s growth while maintaining diversification across a broader basket of technology leaders.
Before diving into the specifics of such ETFs, let us take a closer look at Microsoft’s fiscal third-quarter performance across other key metrics.
A Brief Analysis of MSFT’s Q3 Results
Microsoft’s fiscal third-quarter adjusted earnings per share (EPS) beat the Zacks Consensus Estimate by 4.9%, while its revenues topped the consensus mark by 1.8%. On a year-over-year basis, the company delivered a solid performance, with both its top and bottom lines rising in double digits.
The company’s AI business annual revenue run rate surpassed $37 billion in the fiscal third quarter, reflecting a solid 123% year-over-year improvement. M365 Commercial Cloud revenues increased 19% year over year, while LinkedIn revenues grew 12%.
Commercial bookings grew 7%, excluding the impact from OpenAI, driven by consistent execution in core annuity sales motions. MSFT’s RPO increased 99% year over year to $627 billion, with a weighted average duration of approximately 2.5years when including OpenAI. The company expects roughly 25% of the RPO to be recognized in revenues in the next 12 months.
Microsoft expects healthy growth in its commercial bookings, despite a tough year-over-year comparison and the exclusion of OpenAI impacts, in the fiscal fourth quarter. Microsoft’s cloud gross margin is expected to decline slightly year over year, driven by aggressive AI infrastructure spending and increased GitHub Copilot usage.
Other key segments are expected to deliver steady growth. Consumer Cloud revenues are expected to grow in the low-20% range as the impact of last year’s price increases begins to lap, while LinkedIn and Dynamics 365 are projected to grow 10% and at a low-double-digit rate, respectively. Across these segments, Microsoft is focusing on driving volume and subscription-based growth.
Analysts’ Reaction
Barclays lowered its price target for Microsoft stock from $600 to $545, while Wells Fargo raised its target to $625 from $615. Both firms cited Azure acceleration and AI tailwinds as key growth drivers for Microsoft.
This fund, with net assets worth $105 billion, offers exposure to 317 companies that provide technology software and services, technology hardware and equipment, as well as manufacturers of semiconductor and semiconductor equipment. Of these, Microsoft carries the third spot, holding 10.20% of the fund.
VGT has soared 47.1% over the past year. The fund charges 9 basis points (bps) as fees. This fund holds a Zacks ETF Rank #1 (Strong Buy).
This fund, with assets under management (AUM) worth $103.3 billion, offers exposure to 73 companies from technology hardware, storage and peripherals; software; communications equipment; semiconductors and semiconductor equipment; IT services; and electronic equipment, instruments and components industries. Of these, Microsoft carries the third spot, holding 9.24% of the fund.
XLK has rallied 49.7% over the past year. The fund charges 8 bps as fees. This fund holds a Zacks ETF Rank #1.
This fund, with net assets worth $486.3 million, provides exposure to the 21 largest U.S. companies by market capitalization within the S&P 500 Index. Of these, Microsoft carries the fourth spot, holding 6.15% of the fund.
TOPT has soared 32% over the past year. The fund charges 20 bps as fees. This fund holds a Zacks ETF Rank #2 (Buy).
This fund, with net assets worth $21.45 billion, offers exposure to 139 U.S. electronics, computer software, and hardware, and information technology companies. Of these, Microsoft carries the third spot, holding 4.19% of the fund.
IYW has surged 49.6% over the past year. The fund charges 38 bps as fees. This fund sports a Zacks ETF Rank #1.
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Bet on These ETFs as Microsoft's Shares Slip Despite Q3 Earnings Beat
Key Takeaways
Shares of cloud giant Microsoft (MSFT - Free Report) slipped 4% on the bourses yesterday, following the company’s better-than-expected third-quarter fiscal 2026 results. The decline was likely triggered by MSFT’s substantial capital expenditure on AI infrastructure, which is weighing on free cash flow, along with investor concerns about the long-term returns on these investments.
This pullback presents an opportune moment for investors who remain optimistic about Microsoft Cloud’s growth prospects, with this business having generated more than $54 billion in revenues during the fiscal third quarter.
However, it is important to note that the company continues to face significant capacity constraints in its data centers and AI infrastructure. For instance, demand for its Azure AI services is outpacing supply, which could limit the expected returns from its substantial AI investments and thereby weigh on its financial performance.
Given this backdrop, investors seeking to capture Microsoft’s long-term leadership in cloud computing and enterprise software, while mitigating the idiosyncratic risk of holding a single stock, may consider exchange-traded funds (ETFs) with significant MSFT exposure. This approach enables participation in Microsoft’s growth while maintaining diversification across a broader basket of technology leaders.
Before diving into the specifics of such ETFs, let us take a closer look at Microsoft’s fiscal third-quarter performance across other key metrics.
A Brief Analysis of MSFT’s Q3 Results
Microsoft’s fiscal third-quarter adjusted earnings per share (EPS) beat the Zacks Consensus Estimate by 4.9%, while its revenues topped the consensus mark by 1.8%. On a year-over-year basis, the company delivered a solid performance, with both its top and bottom lines rising in double digits.
The company’s AI business annual revenue run rate surpassed $37 billion in the fiscal third quarter, reflecting a solid 123% year-over-year improvement. M365 Commercial Cloud revenues increased 19% year over year, while LinkedIn revenues grew 12%.
Commercial bookings grew 7%, excluding the impact from OpenAI, driven by consistent execution in core annuity sales motions. MSFT’s RPO increased 99% year over year to $627 billion, with a weighted average duration of approximately 2.5years when including OpenAI. The company expects roughly 25% of the RPO to be recognized in revenues in the next 12 months.
Microsoft expects healthy growth in its commercial bookings, despite a tough year-over-year comparison and the exclusion of OpenAI impacts, in the fiscal fourth quarter. Microsoft’s cloud gross margin is expected to decline slightly year over year, driven by aggressive AI infrastructure spending and increased GitHub Copilot usage.
Other key segments are expected to deliver steady growth. Consumer Cloud revenues are expected to grow in the low-20% range as the impact of last year’s price increases begins to lap, while LinkedIn and Dynamics 365 are projected to grow 10% and at a low-double-digit rate, respectively. Across these segments, Microsoft is focusing on driving volume and subscription-based growth.
Analysts’ Reaction
Barclays lowered its price target for Microsoft stock from $600 to $545, while Wells Fargo raised its target to $625 from $615. Both firms cited Azure acceleration and AI tailwinds as key growth drivers for Microsoft.
Microsoft-Heavy ETFs to Buy
Vanguard Information Technology ETF (VGT - Free Report)
This fund, with net assets worth $105 billion, offers exposure to 317 companies that provide technology software and services, technology hardware and equipment, as well as manufacturers of semiconductor and semiconductor equipment. Of these, Microsoft carries the third spot, holding 10.20% of the fund.
VGT has soared 47.1% over the past year. The fund charges 9 basis points (bps) as fees. This fund holds a Zacks ETF Rank #1 (Strong Buy).
Select Sector SPDR Technology ETF (XLK - Free Report)
This fund, with assets under management (AUM) worth $103.3 billion, offers exposure to 73 companies from technology hardware, storage and peripherals; software; communications equipment; semiconductors and semiconductor equipment; IT services; and electronic equipment, instruments and components industries. Of these, Microsoft carries the third spot, holding 9.24% of the fund.
XLK has rallied 49.7% over the past year. The fund charges 8 bps as fees. This fund holds a Zacks ETF Rank #1.
iShares Top 20 U.S. Stocks ETF (TOPT - Free Report)
This fund, with net assets worth $486.3 million, provides exposure to the 21 largest U.S. companies by market capitalization within the S&P 500 Index. Of these, Microsoft carries the fourth spot, holding 6.15% of the fund.
TOPT has soared 32% over the past year. The fund charges 20 bps as fees. This fund holds a Zacks ETF Rank #2 (Buy).
iShares Dow Jones US Technology ETF (IYW - Free Report)
This fund, with net assets worth $21.45 billion, offers exposure to 139 U.S. electronics, computer software, and hardware, and information technology companies. Of these, Microsoft carries the third spot, holding 4.19% of the fund.
IYW has surged 49.6% over the past year. The fund charges 38 bps as fees. This fund sports a Zacks ETF Rank #1.