U.S. government contracts are big business for the companies that get them. In 2019, cloud giants Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT) are battling over a potentially $10 billion contract. The Joint Enterprise Defense Infrastructure (JEDI) project could be the crown jewel of cloud contracts. The deal itself is worth $10 billion, which may not directly move the needle for Microsoft and Amazon stock. Both have market caps around $1 trillion. But a partnership with the U.S. government could be worth much more for the JEDI winner and its shareholders in the long term.
Narrowing The Field
In addition to Microsoft and Amazon, Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Oracle (NYSE: ORCL) were also initially in the running for JEDI. Bids were submitted in late 2018, but contenders have been dropping like flies. At one point, Amazon was so close to landing JEDI that AMZN stock investors could almost taste it. Unfortunately, Oracle stepped in and protested a potential Amazon conflict of interest in the process. The alleged conflict centers on Amazon employee Deap Ubhi, who previously worked at the Department of Defense.
This month, Oracle was officially removed from the running after a court ruled that the company could not meet a set of gate criteria as of the time its bid was submitted. Google has also dropped out of the running after employees protested the bid. The company determined that JEDI would conflict with its corporate values.
That leaves only early front-runner Amazon and underdog Microsoft left in the running.
Microsoft Coming on Strong
Wedbush analyst Daniel Ives says Amazon remains the favorite, which is great news for Amazon stock. However, Ives says Washington contacts indicate Microsoft has closed the gap on Amazon in the past six months. In fact, Ives says Microsoft now has a realistic shot at landing JEDI.
“Based on our discussions and analysis from the Beltway it now appears this battle for JEDI is more of a ~50%/50% AWS vs. MSFT chances to win at this point rather than the runaway (~80%/20%) that it appeared to be with AWS getting ready to pop the champagne roughly a year ago,” Ives says.
But before Amazon stock investors dismiss a $10 billion contract, consider the longer-term. Ives estimates the true value of JEDI is around $100 billion. He says the JEDI winner can anticipate a number of additional government contracts and renewals for years to come.
JEDI likely played a key role in Amazon setting up a new headquarters in Crystal City, VA, just outside of D.C. That decision is an indication of just how important JEDI may be to Amazon stock.
Trump and Amazon Stock
At first glance, Amazon may still seem to have the advantage in the JEDI dog race. However, Amazon stock investors have been dealing with a major headache in Washington since November 2016.
U.S. President Donald Trump has made crystal clear throughout the years that he disdains Amazon and its billionaire CEO Jeff Bezos. Trump has repeatedly ripped Amazon for not paying its fair share of taxes and not paying fair rates to the U.S. Postal Service. Trump said last year that he is investigating potential antitrust violations by Amazon. He has repeatedly called the Bezos-owned Washington Post “fake news.” Trump has even referred to Bezos himself as “Jeff Bozo.”
Last year, sources told Axios that Trump is “obsessed with Amazon.” It’s clearly not a positive obsession.
So what does that mean for JEDI? In principle, Trump’s beef with Bezos should have nothing to do with the Department of Defense or a government cloud computing contract. In reality, Americans have repeatedly seen Trump apply pressure to different departments of the government to get his way. If Trump doesn’t want Amazon to land JEDI, AMZN stock investors can bet he will do everything in his power to push for Microsoft.
Takeaway for AMZN and MSFT
The timing of the JEDI award is up in the air at this point. Ives says investors may get some clarity in the coming months. Amazon stock investors know AWS has been the gold standard of cloud computing since its inception. So if Microsoft lands JEDI, it could have long-lasting ramifications within the cloud industry.
MSFT stock and AMZN stock may or may not initially react to the JEDI award news. But investors should make no mistake about the potential long-term value of the JEDI contract.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
