Microsoft Poised to Join the $3 Trillion Club: ETFs Provide a Safer Bet
After Apple’s market cap hit the $3 trillion mark on June 30th, investors have been eagerly speculating on which company will be the next to join this exclusive club. According to Wedbush, Microsoft is the likely candidate to achieve this milestone. This prediction is reinforced by Microsoft’s strong growth in the areas of Artificial Intelligence (AI), Intelligent Cloud, and Productivity and Business Processes.
Microsoft’s Intelligent Cloud revenues have been bolstered by the success of Azure and other cloud services. Additionally, the company’s partnership with ChatGPT creator OpenAI, as well as the integration of AI technology into its Bing search engine, have garnered attention and propelled the company’s success in the AI domain. Microsoft’s Talent Solutions have also performed well, contributing to increased revenues through its LinkedIn platform.
However, despite these positive developments, Microsoft faces challenges in the competitive cloud space. The company has been investing heavily in enhancing Azure, and the intense competition may put pressure on its profitability. Furthermore, a subdued economic outlook could potentially impact Microsoft’s Windows business.
From a valuation standpoint, Microsoft’s price-to-earnings ratio (P/E) stands at 36.1 times, slightly lower than the industry average of 37.3 times. Looking ahead, the company’s forward P/E ratio is higher than the industry score, suggesting a relatively higher valuation. However, it is important to note that a higher P/E ratio can also indicate investor confidence in a particular stock.
Considering key financial metrics, Microsoft boasts a higher return-on-equity (ROE) of 39% compared to the industry average of 25.4%. Similarly, the company’s return-on-assets (ROA) slightly exceeds the industry benchmark. On the other hand, the estimated 3-5-year earnings per share (EPS) growth rate for Microsoft is 11.7%, lower than the industry average of 16.4%.
Investors looking to capitalize on Wedbush’s prediction but remain cautious about the competitive cloud landscape may consider investing in exchange-traded funds (ETFs). ETFs allow investors to diversify their portfolios and mitigate the average performance of a single company by including other high-performing stocks.
Here are a few ETFs with substantial exposure to Microsoft:
1. Select Sector SPDR Technology ETF (XLK): This ETF allocates 22.81% of its weight to Microsoft, making it the second-largest holding. The fund holds a Zacks Rank #1.
2. Vanguard Information Technology ETF (VGT): With Microsoft occupying the top spot at 20.68%, this ETF offers investors significant exposure to the tech giant. It also holds a Zacks Rank #1.
3. Fidelity MSCI Information Technology Index ETF (FTEC): Microsoft holds the second spot with a weight of 20.68%. This fund also holds a Zacks Rank #1.
Investors should be aware that Microsoft’s stock currently carries a Zacks Rank #3 (Hold). However, it boasts a Growth Score of ‘B’ and the highest Momentum score of ‘A’ at the time of writing.
By following these ETF recommendations, investors can potentially benefit from Microsoft’s success while minimizing risks associated with individual company performance.
In conclusion, Microsoft is well-positioned to join the prestigious $3 trillion club. The company’s strong growth in AI, Intelligent Cloud, and Productivity and Business Processes have contributed to its success. However, challenges in the cloud space and a potentially subdued economic outlook pose risks. Despite these factors, ETFs that heavily feature Microsoft provide investors with a safer bet.
