Microsoft Earnings Point Us to One ETF Poised to Profit

We’re wrapping up an important earnings week.

All FAANG companies will release earnings for the last quarter of 2020 this week. First up was Microsoft Corp. (Nasdaq: MSFT), which released its report Tuesday after the close.

Revenue was up 17% and earnings per share (EPS) was up 34%. That’s not surprising given the year that tech has seen ... but I wanted to see the break down. Personal computing saw a revenue increase of 14% and LinkedIn revenue — which Microsoft owns — was up 23%. Both are impressive.

But what was even more impressive was the increases in cloud-based products and services. Dynamics 365 revenue growth was 39%. Server products and cloud services revenue was up 26%, driven by Azure revenue growth of 50%.

Cloud platforms and cloud computing capabilities are becoming increasingly important for technology developments as a whole ... even for a giant such as Microsoft. The business has been pivoting and adapting for years by transitioning away from the physical to the cloud.

Shares of Microsoft are up 44% over the past year. And even though there’s still profit potential, I wanted to see if there was a way to unlock even more gains from the cloud-computing trend.

Instead of trying to pick the next great up and coming cloud-computing stock, I decided to take a look at potential ETFs that would give me exposure to these companies while limiting my downside risk.

Here’s a chart of the top four cloud computing ETFs over the past two years:

All have seen solid double- or triple-digit gains. That’s impressive, but let’s use the Weiss Ratings scanner to take a closer look.

Three of those shown above have a “Hold” rating, with only one generating a “Buy”. Let’s take a look at the “Holds” first.

The holdings include companies that license and deliver software-as-a-service (SaaS) subscriptions, create online apps or platform-as-a-service (PaaS), provide online or virtual computing infrastructure, own and manage data server storage facilities, or manufacture or distribute infrastructure components used in cloud and edge computing.

You can see what I mean by broad definition. Shares are up 65% over the past year.

The management works to identify the companies that are building the backbone of cloud computing infrastructure and helping other companies go cloud based. It generally excludes firms whose primary business model is the distribution of software or services via the cloud, however, is does hold stocks such as Zoom Video Communications (Nasdaq: ZM), DocuSign, Inc. (Nasdaq: DOCU) and Workday Inc. (Nasdaq: WDAY).

Shares of IVES are up 40% in the past year.

It requires that any newly included stock demonstrates a revenue growth rate of at least 15% for the past two fiscal years. Existing stocks must maintain the requirement of at least a 7% revenue growth rate in at least one of the past two years.

After those requirements, the holdings are then equally weighted. The emphasis of sustainable growth attracted many investors last year and made WCLD one of the fastest-growing ETFs of 2020. Shares prices are up 99% over the past year.

Investors may want to keep an eye on these three “Hold” ETFs to see how they perform in the near future.

But let’s turn to our “Buy”-rated cloud-computing ETF that you might just want to put into the technology section of your personal portfolio sooner rather than later.

First Trust Cloud Computing ETF (Nasdaq: SKYY) has $4.5 billion in net. It breaks its holdings down into three categories. These are pure plays, nonpure plays and broad technology conglomerates. Since it doesn’t filter for revenue, any stock with involvement in cloud computing is eligible no matter how small it is.

It is the largest out of the four top-performing cloud computing ETFs, and with its broad requirements, it allows for broad exposure to the industry. Shares are up 54.6% over the past year. And as the only ETF to generate a “Buy” rating, it’s the one I would most highly recommend out of the four mentioned above.

Before I leave you today, I do have one honorable mention. ARK Next Generation Internet ETF (NYSE Arca: ARKW) is also rated a “Buy” right now. The fund looks for companies under the theme of next generation internet. So, it’s not a pure cloud-computing play, but it does include cloud-computing companies as part of its selection universe.

If you’ve been looking to get exposure to this exploding market, here are some great ways to do so. And remember, you can always type these tickers into WeissRatings.com to see even more information.

Even in a lesser-known field like cloud computing, it’s reassuring that I can count on the Weiss Ratings. You should too.

Best wishes,

Kelly