Amazon (ticker: AMZN) Web Services, or AWS, lost out despite being the favorite over Microsoft’s (MSFT) Azure cloud system to win the contract to help America’s armed forces modernize.
The contract is called JEDI. You have to give the DoD points for creativity. JEDI stands for Joint Enterprise Defense Infrastructure. “Cloud is a fundamental component of the global infrastructure that will empower the war fighter with data and is critical to maintaining out military’s technological advantage,” wrote then-acting Defense Secretary Patrick Shanahan in December 2018, when the DoD announced the project.
Here is what some analysts are saying.
“While Azure has been viewed consistently as a scrappy competitor that has significantly less market share, technology, and clout than AWS, this deal may, in the minds of some would-be buyers, even the playing field and over time potentially thrust Azure into a leadership position,” RBC analyst Alex Zukin wrote in a Monday research report titled “Return of the JEDI.” (You have to give Wall Street points for creativity, too.) “Furthermore, aside from revenue, we view the massive amount of data that Microsoft will have access to as being a potential advantage over time, as access to and quality of data become more important in developing technology like machine learning.” Zukin rates Microsoft shares the equivalent of Buy and has a $163 price target for shares, up 17% from recent levels.
In another Monday report, Evercore ISI analyst Kirk Materne said: “This was a nice win for Microsoft and the Azure team.” The contract is worth “up to $10 billion” and he sees spending reaching about $1 billion a year over the next couple of years. Materne points out that $1 billion is small for Microsoft, but the deal is important from a “reputational perspective.”
Stifel analyst Brad Reback chimed in, saying on Monday that “assuming full exercise of the $10B award—$1B a year over 10 years—we think this can add roughly $200M to $300M in [free cash flow] annually.” He called it a “great win” for Microsoft. “We think there is plenty of opportunity for similar size (or even larger) deals like this available across enterprises—and that in coming years—Azure has the potential to be Microsoft’s largest revenue stream and profit pool.” The growth in the cloud is the much bigger deal for Microsoft and the industry than one DoD contract alone.
In a Friday report, Wedbush analyst Dan Ives wrote that CEOs “Bezos and Nadella are both laser focused on this cloud opportunity in the DoD and other agencies to successfully capture what could cumulatively be a $100 billion cloud market opportunity over the coming years.” He thinks the initial $10 billion figure is just a start and even though Microsoft was the victor, government cloud spending will benefit the entire sector, including Amazon,Dell Technologies (DELL) and International Business Machines (IBM).
Amazon lost, but its AWS business isn’t hurting. It remains the cloud market leader and “AWS commitments continue to grow faster than AWS revenues,” wrote MKM Partners analyst Rohit Kulkarni in a Friday research report recapping Amazon’s third-quarter earnings report. He rates Amazon shares Buy and has a $2,350 price target for the stock.
Cloud spending is ramping and Microsoft and Amazon will continue to battle it out for market share. What’s more, the importance of the cloud is one reason the two tech giants will also battle it out for title of the most valuable tech company in the world. Microsoft is now worth more than $1 trillion. Amazon, on the other hand, is valued at a “mere” $870 billion.
Microsoft stock was up 3.4% to $145.55 shortly after the market opened on Monday, while Amazon was down 0.7% $1,748.97. The Dow Jones Industrial Average was up 0.7%. Both Amazon and Microsoft reported third-quarter results last week.