4 Reasons to be Bullish on Microsoft ETFs Now

Microsoft MSFT has been a true coronavirus winner this year as it benefited from the momentum in Azure and impressive Teams user growth courtesy of the work-and-learn-from-home trend. Shares are up 28.4% this year despite the tech sell-off in September. In the past month, MSFT is down 5.6%.

However, MSFT shares now look ripe for taking them back into your portfolio. We’ll tell you why.

Microsoft Has an “Attractive Valuation”

CNBC’s Jim Cramer recently said that tech behemoths including Microsoft have “reached attractive valuations” after the September selloffs. Going by valuation metrics, P/E (ttm) of Microsoft is now 34.9 times versus the industry-average of 41.1 times. Forward P/E of MSFT is 31.4 times versus the industry score of 41.7 times. This ensures undervaluation.

Investors should also note that return-on-equity of Microsoft is 39.5%, higher than industry average of 29.8%. Plus, both return-on-assets and return-on-capital of Microsoft are higher than the industry measures.

Microsoft Strengthening Presence in Red-Hot Gaming Space

Microsoft announced its plans to acquire video game behemoth Bethesda’s parent company ZeniMax Media, one of the world’s most-important gaming firms, for $7.5 billion. “The publisher of franchises ranging from “The Elder Scrolls” and “Doom” to “Wolfenstein” and “Fallout,” ZeniMax’s titles are some of the most storied in the industry,” if we go by a Yahoo Finance article.

Microsoft’s latest acquisition will add 8 new studios to the company’s portfolio, bringing the total to 23. Also, ZeniMax’s titles will appear on Microsoft’s Xbox Game Pass subscription service on the date of launch. Titles from third-party developers often don’t receive this accessibility for a long time after their initial release, per the Yahoo Finance article.

ZeniMax’s 8 game studios help Microsoft in pushing out titles for every form of gaming, whether that’s on consoles, PCs, or mobile. Solid uptake of Surface devices and Xbox Game Pass, in any case, has been aiding Microsoft’s growth. With video gaming emerging as a hot concept amid lockdowns, Microsoft’s latest move seems extremely strategic (read: 5 ETFs to Play Record-Breaking U.S. Gaming Sales in Q2).

Dividend Booster in a Low-Rate Environment + Good Growth Pick

Microsoft recently enhanced shareholder returns by boosting quarterly dividends by 9.8%. The company will now pay out a quarterly dividend of 56 cents per share, suggesting a 9.8% rise from the prior rate of 51 cents. The increased dividend will be paid out on Dec 10 to shareholders of record as of Nov 19, 2020.

This has happened in a difficult situation when most companies are suspending dividends and share repurchases due to the coronavirus outbreak. Investors should also note that dividend could be a great scheme to seek some current income in the current low-rate environment. So, Microsoft wins here too.

If we look at the growth picture, Microsoft is expected to post 11.1% growth in EPS in fiscal 2021 versus the industry-average of 6.2%. For the September 2020 quarter, the EPS growth expectation is 11% for Microsoft compared with the industry-average of 2.9%. If this was not enough, we all know that Microsoft is a cash-rich company.

Tech Fever Looks to Be Coming Back With Rising Virus Cases

Last but not the least, tech shares that have underperformed in September because of profit booking started showing signs of improvement. Notably, new COVID cases have risen meaningfully in Arkansas, Colorado, Idaho, Montana, Nebraska and North Dakota over the past week. This piece of information triggered fear of more phases of lockdowns and stalled economic recovery.

This also ensures a prolonged period of social distancing and continued surge of digitization as well as a renewed rally in tech shares. Plus, the latest correction in the technology segment opened up a great opportunity to enter the space.

ETFs in Focus

Below we highlight five funds having Microsoft with a double-digit allocation:

Technology Select Sector SPDR Fund XLK – Weight 20.23%

iShares U.S. Technology ETF IYW – Weight 17.88%

Vanguard Information Technology ETF VGT – Weight 16.51%

Fidelity MSCI Information Technology Index ETF FTEC – Weight 16.50%

iShares Global Tech ETF IXN – Weight 16.09%

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Microsoft Corporation (MSFT): Free Stock Analysis Report
Technology Select Sector SPDR ETF (XLK): ETF Research Reports
Fidelity MSCI Information Technology Index ETF (FTEC): ETF Research Reports
iShares Global Tech ETF (IXN): ETF Research Reports
Vanguard Information Technology ETF (VGT): ETF Research Reports
iShares U.S. Technology ETF (IYW): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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