It’s been a stellar year for Microsoft (NASDAQ:MSFT). MSFT stock is up 70% so far this year as investors cheer Satya Nadella’s leadership and the firm’s impressive resurgence.
Just a few years ago, Microsoft stock was viewed as a sluggish behemoth whose business was out of touch with emerging technology. Fast-forward to today and MSFT has taken on, and defeated, Amazon (NASDAQ:AMZN) in the cloud computing space.
JEDI Is a Huge Win for Microsoft Stock
Last week, the U.S. Department of Defense announced that Microsoft beat out Amazon for a decade-long Joint Enterprise Defense Infrastructure (JEDI) deal. Most expected AMZN to run away with the $10 billion contract as the firm has long been an industry leader in the cloud computing space. However, it was Microsoft who emerged victorious, sending the MSFT stock price soaring.
Many pointed to Trump’s ongoing personal vendetta with Amazon and its CEO Jeff Bezos as reason for the deal. But regardless, the DOD’s decision to go with MSFT will provide the firm with several tailwinds over the next decade. Not only does the contract open the door for further government deals, but it sends a message to enterprise customers who are looking for secure cloud providers.
Wedbush analysts Daniel Ives and Strecker Backe said the JEDI deal is a snapshot of what’s to come in the next phase of cloud spending. While Amazon was initially the clear winner, MSFT’s cloud business is thriving and appears to be closing the gap between the two.
Ives and Backe called the JEDI win a “seminal moment in the cloud battle between the two stalwarts.” They noted that although Amazon is likely to fight the DOD’s decision in court, it is “a paradigm changer for Microsoft […] to be declared victor in this hard fought technology/K Street battle that took place over the last year and remains a black eye for Amazon and Bezos.”
They’re not alone in highlighting the monumental shift that the JEDI contract represents. Credit Suisse’s Brad Zelnick said of the deal, “We view the decision as a major landmark win that can help MSFT earn more business with other US Federal agencies as well as international public sector organizations.”
Value Questions
While there’s no denying that the JEDI contract will provide a tailwind for MSFT stock over the next decade, some are questioning whether the market overreacted to the news. Fellow InvestorPlace contributor Ian Bezek wrote that MSFT stock’s $3 increase following news of the contract increased the firm’s valuation by a whopping $22 billion. That’s more than double the contract’s worth, and that’s assuming a 100% profit margin.
Morningstar analyst Dan Romanoff pointed out as much when he gave the firm a “fairly valued” rating with a $155 price target. He noted that although the DOD choosing MSFT over Amazon validates the firm’s impressive Azure platform, he stated that:
the JEDI deal represents $1 billion annually in incremental revenue, but at a lower margin than the corporate average, so we estimate this contract will add approximately$0.03 to earnings per share next year and less than $1 to the share price.
Romanoff was optimistic about the potential for Azure moving forward, though. He pointed to MSFT’s $500 million deal with Walgreens (NASDAQ:WBA), $2 billion AT&T (NYSE:T) deal, and an unrelated DOD contract worth $1.8 billion as evidence that Azure is gaining traction.
MSFT Stock Is a Buy
Master investor Warren Buffett says, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” That perfectly describes the current situation for MSFT investors. No, Microsoft stock is not in the bargain bin, but that doesn’t mean it’s overpriced.
MSFT stock is a solid company with a lot of potential over the next decade as its cloud business continues to grow. While much of JEDI’s financial impact has been priced in, the significance of defeating Amazon is a clear message that MSFT stock is a force to be reckoned with in the cloud computing space. Moving forward, I’d expect to see the firm pick up several more big-name customers who are following the U.S. government’s lead.
While MSFT certainly isn’t a cheap buy, it’s a quality stock to hold onto for the long-term.
As of this writing Laura Hoy was long T and AMZN.
