Microsoft Stock Is No Longer a Dark Horse in Race for JEDI Contract

If you had asked almost anyone a year ago which stock would benefit from the Pentagon’s $10 billion, 10-year JEDI cloud contract, chances are (NASDAQ:AMZN) stock would have been the pick. No contest.

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Amazon Web Services (AWS) has been the indisputable leader in cloud-computing services. Microsoft Corporation’s (NASDAQ:MSFT) Azure has held the number two spot, while Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) has been a distant third place. However, over the past 12 months, Microsoft stock has made some substantial gains as it demonstrates it’s a force to be reckoned with when it comes to cloud services.

MSFT has noticeably not been part of the popular FAANG stocks, signaling the general public’s sentiment that it is not “new” tech, and that it represents something old and stodgy. But ever since Satya Nadella became MSFT’s CEO, taking the helm from Steve Ballmer, Microsoft stock has performed remarkably well. Part of that has to do with overall ebullience over the tech sector, but a good chunk is due to Nadella’s reorganization and focus on steering MSFT into the future.

Increasingly, it has become clear that Microsoft will not be left behind like some of the high-flying companies that fell from grace during the Dot Com Boom (and Bust).

AMZN may continue to disrupt every high-margin industry it can and it will no doubt continue to dominate headlines.  But when it comes to the JEDI contract, it may well end up being Microsoft that takes the whole enchilada. Microsoft stock would then inevitably be re-rated upwards.

The JEDI Contract

The Department of Defense is looking to build an enterprise cloud. The contract is a winner-take-all situation, which the DOD believes is best because it “improves security, improves data accessibility and simplifies the Department’s ability to adopt and use cloud services.”

Recall that in 2013, AMZN won the coveted $600 million contract to develop a cloud for the Central Intelligence Agency (CIA). It was a deal met with suspicion by the intelligence community, which is extremely sensitive to risk. Nothing screamed risk like teaming up with a publicly-traded commercial company, but as one former intelligence official was quoted as saying, “we decided we needed to buy innovation.”

Times Are Changing

Recently, MSFT won an almost $2 billion contract for the U.S. military.

Last May, the Department of Defense extended its agreement to use Microsoft’s Azure Government, Office 365, and Windows 10. Over “10 million government customers from every federal cabinet level, including the Department of Defense” rely on existing Microsoft services, in particular Cloud for Government.

So, MSFT clearly has a strong relationship with the Department of Defense, and that could give it a leg up in snagging the JEDI contract. By winning that deal,  MSFT could propel MSFT stock to a valuation closer to 35 or 40 times its earnings, versus Microsoft stock’s current level of around 28 times.

The Bottom Line on Microsoft Stock

MSFT will certainly leverage its decades-long relationship with the Department of Defense to secure the lucrative JEDI deal. Even Wedbush Securities analyst Dan Ives indicated that Microsoft has a 40% chance of winning over AWS, up from his previous estimate of 20%. It’s far from a sure thing, but MSFT has improved its Azure Government cloud (which is now certified to handle classified information) and looks very competitive.

Even if Microsoft isn’t able to win the JEDI contract, it’s clear that it would be a top contender for future billion dollar deals to come, since AMZN is no longer the go-to cloud vendor for the government.

As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.



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