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Buy Microsoft Stock Because JEDI Contract Changes the Game

Microsoft is becoming the "top dog" in the cloud computing world thanks to Pentagon deal

Shares of Microsoft (NASDAQ:MSFT) soared to all-time highs in late October after the cloud giant prevailed over Amazon (NASDAQ:AMZN) and won the U.S. Department of Defense’s highly coveted, $10 billion JEDI cloud computing contract.

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Make no mistake about it. This is a huge deal. Indeed, it’s a reason to buy and hold MSFT stock for the next few years.

The logic is simple. Over at Microsoft, everything is about the company’s cloud businesses. Microsoft winning the highly coveted and widely publicized JEDI contract is a bold statement from the one of the world’s most respected agencies that Microsoft’s cloud capabilities are second to none — not even cloud market leader Amazon.

The result? More and more businesses will select Microsoft as their cloud service provider. Some may even pivot from Amazon to Microsoft. Microsoft will continue to expand share in the secular growth cloud services market. The company’s cloud businesses will continue to grow at a robust rate. Revenues and profits will march higher. So will MSFT stock.

It’s that simple.

The investment implication? Stick with MSFT stock. This one is going higher.

JEDI Win Changes the Game

Zooming out, the JEDI contract win is a game changer for Microsoft and the entire cloud services market.

Amazon has long been the unchallenged leader in the cloud services market. But, over the past several years, Microsoft has emerged as a strong second fiddle. Still, despite Microsoft’s market share gains over the past few years, Amazon has maintained its leadership, and has widely been seen as the biggest and best in the cloud market.

That’s why Amazon was tapped as the favorite to win the highly coveted JEDI contract. But, Microsoft won.

That’s a game changer. The JEDI contract was the most publicized and followed contract in the cloud computing world. Amazon lost it. Microsoft won it. The broad market implication? Microsoft is no longer a second fiddle. Its cloud services are better than Amazon’s cloud services. As Vice President of Cloud Architecture at Unitas Global Chris Smith shared: “The JEDI contract will propel Microsoft to the forefront of the cloud wars by allowing them to invest, innovate and execute on their continually growing public cloud environment.”

Sure, this implication may not be entirely true. But, it is the implication that many businesses around the world will make. As a result, many of those businesses will join the Microsoft cloud ecosystem, and Microsoft’s share expansion will persist over the next few years.

In this sense, the JEDI contract win actually creates runway for Microsoft to go from second fiddle to number one player.

Microsoft Stock Will March Higher

As a result of Microsoft becoming the top player in the cloud market over the next few years, Microsoft stock should march higher.

The logic is simple. Microsoft stock trades based on the company’s cloud businesses. Most of Microsoft’s revenue growth comes from its cloud businesses — as does most of its margin expansion and profit growth. Thus, as goes Microsoft’s cloud businesses, so go Microsoft’s revenue and profit growth rates, and so goes MSFT stock.

The JEDI contract win ensures that Microsoft will continue to expand share in the big growth cloud market — perhaps even at an accelerated rate. As such, Microsoft’s cloud businesses should sustain big growth rates. This will lead to sustained big revenue and profit growth at Microsoft. Sustained big profit growth will correlate to sustained big gains in Microsoft stock.

What’s the big picture? The JEDI contract win creates visible runway for Microsoft stock to keep running higher.

Bottom Line on MSFT Stock

Microsoft winning the JEDI contract is a game changer, in that it creates visibility for Microsoft to become the number one player in the secular growth public cloud market. Ultimately, that means Microsoft’s revenue and profit growth rates will remain in double-digit territory for a lot longer, and sustained double-digit profit growth should keep MSFT stock on a winning path for the foreseeable future.

As of this writing, Luke Lango was long MSFT. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/buy-microsoft-stock-because-jedi-contract-changes-the-game/.

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