ETFs to Buy as Microsoft's Shares Slump Despite Q2 Earnings Beat

Shares of cloud giant Microsoft MSFT slumped 10% at the bourses yesterday, despite the company comfortably surpassing analysts’ expectations for second-quarter fiscal 2026 earnings and revenues. The decline was most likely triggered by the company’s higher-than-expected capital expenditure in the fourth quarter and slowing cloud growth expectations. 

This pullback presents an opportune moment for investors who remain optimistic about Microsoft Cloud’s growth prospects, with this business having surpassed $50 billion in revenues for the first time in the fourth quarter. 

However, one must be mindful of the fact that the company is currently facing significant capacity constraints regarding its data centers and AI infrastructure, which might restrict the desired return from its enormous investments in AI and thereby affect its financials. 

Against this backdrop, investors seeking to benefit from MSFT’s growth in cloud computing and software, while avoiding the stock’s idiosyncratic risk, may consider investing in exchange-traded funds (ETFs) with heavy exposure to Microsoft. This would give the investors exposure to Microsoft's growth while spreading risk across other leading firms from technology and other industries.

Now, before diving into the specifics of such ETFs, let us do a detailed analysis of how Microsoft performed in the fiscal second quarter in terms of other metrics.

A Brief Analysis of MSFT’s Q2 Results

Microsoft’s fiscal second-quarter adjusted earnings per share (EPS) beat the Zacks Consensus Estimate by 6.7%, while its revenues topped the consensus mark by 1.3%. On a year-over-year basis, the company delivered a solid performance, with both its top and bottom lines rising in double digits.

Microsoft witnessed a solid year-over-year increase in revenues from all its products in the fourth quarter, except Xbox Content and Services. 

In particular, Azure and other cloud services revenues grew 39%, driven by demand for MSFT’s portfolio of services with continued growth across all workloads. On the other hand, Microsoft 365 Commercial products and cloud services revenues increased 16%, while Microsoft 365 Consumer products and cloud services revenue improved 27%. Moreover, LinkedIn revenues went up 11% on the back of Marketing Solutions growth. 

Looking ahead, Microsoft expects to generate revenues in the range of $80.65-$81.75 billion, which lies higher than the Zacks Consensus Estimate of $80.47 billion, in the fiscal third quarter.  Strong growth across its commercial businesses is expected to boost this revenue performance in the ongoing quarter. 

On a dismal note, the company expects its Microsoft Cloud gross margin percentage to go down year over year to roughly 65%, on account of continued investments in AI. Its Xbox content and services revenues are also projected to decline in the mid-single digits in the fiscal third quarter.

Analysts’ Reaction

JPMorgan analyst Mark Murphy maintained an Overweight rating on Microsoft but lowered the price target from $575 to $550, citing his concern about the company’s limitation in terms of CPU supply constraints, which might affect the growth of Azure (as cited in Finviz). 

In the same line of action, Goldman Sachs analyst Gabriela Borges maintained a Buy rating and lowered the price target from $655 to $600.    

Microsoft-Heavy ETFs to Buy

iShares Dow Jones US Technology ETF IYW 

This fund, with net assets worth $21.06 billion, offers exposure to 141 U.S. electronics, computer software and hardware, and information technology companies. Of these, Microsoft carries the third spot, holding 12.32% of the fund. Tech giants, Nvidia NVDA and Apple AAPL hold the first and second spots in this fund, respectively, with 17.20% and 14.39% weightage. 

IYW has surged 25.9% over the past year. The fund charges 38 basis points (bps) as fees. Its volume is good at an average of 982,393 shares a day. This fund sports a Zacks ETF Rank #1 (Strong Buy). 

iShares Top 20 U.S. Stocks ETF TOPT 

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 third spot, holding 11.23% of the fund. NVDA and AAPL hold the first and second spots in this fund, respectively, with 16.30% and 13.30% weightage. 

TOPT has soared 17% over the past year. The fund charges 20 bps as fees. Its volume is at an average of 445,954 shares a day. This fund holds a Zacks ETF Rank #1.

Select Sector SPDR Technology ETF XLK 

This fund, with assets under management (AUM) worth $94.07 billion, offers exposure to 70 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 11.38% of the fund. NVDA and AAPL hold the first and second spots in this fund, respectively, with 14.80% and 12.05% weightage. 

XLK has rallied 26.5% over the past year. The fund charges 8 bps as fees. It traded at a volume of 25.58 million shares in the last trading session. This fund holds a Zacks ETF Rank #1. 

Vanguard Information Technology ETF VGT 

This fund, with net assets worth $112.8 billion, offers exposure to 320 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 12.19% of the fund. NVDA and AAPL hold the first and second spots in this fund, respectively, with 17.47% and 14.89% weightage. 

VGT has soared 22.8% over the past year. The fund charges 9 bps as fees. Its volume is at an average of 523,321 shares a day. This fund holds a Zacks ETF Rank #1.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research