The head of the Defense Department on Friday said there was no bias in the agency’s awarding of an enormous $10 billion cloud computing contract known as JEDI to Microsoft Corporation (NASDAQ: MSFT).
But for investors and analysts trying to figure out which computing companies may have the advantage in what could be a trillion-dollar opportunity over the next decade, the allegation by losing bidder Amazon.com, Inc. (NASDAQ: AMZN) of behind-closed-door gamesmanship and political favoritism may obscure the picture.
The current political landscape has "further complicated" the whole government contracting sweepstakes.
What Happened With JEDI
The Defense Department last month awarded the massive contract for modernizing the military’s cloud computing systems to Microsoft, but on Thursday Amazon challenged the award, alleging “aspects of the JEDI evaluation process contained clear deficiencies, errors, and unmistakable bias.”
President Donald Trump is a vocal critic of Amazon CEO Jeff Bezos, in part because of his ownership of The Washington Post, which Trump considers overly critical.
A recently-released book by former Defense Department speechwriter Guy Snodgrass said Trump told then-Defense Secretary James Mattis that he wanted the DOD to “screw Amazon” by choosing another company for JEDI. Snodgrass wrote, however, that Mattis rejected the idea, saying, “We’re not going to do that. This will be done by the book, both legally and ethically.”
Esper: No Outside Influence For JEDI Contract
On Friday, current Defense Secretary Mark Esper rejected the idea of personal political animus on the part of the president in the decision.
“I am confident that it was conducted freely and fairly without any type of outside influence,” Esper said at a news conference in Seoul, South Korea, according to The Associated Press.
Microsoft hasn’t commented on the challenge, which Amazon filed in the U.S. Court of Federal Claims. Challenges to bid awards for federal government contracts are fairly common.
Wedbush: Tide Was Turning Toward Microsoft
Wedbush analyst Daniel Ives said the challenge isn’t likely to upend the award to Microsoft.
“We saw the tide turning significantly in the Beltway around this flagship cloud deal for Microsoft and (CEO Satya) Nadella,” Ives wrote in a note.
Ives, who kept an Outperform rating on Microsoft, said the opportunities for cloud business in the Department of Defense and other federal agencies, as well as in the private sector, are enormous – potentially a cumulative $100 billion opportunity in the coming few years, and maybe $1 trillion over the decade.
“This is a game changer for Microsoft as ... JEDI will have a ripple effect for the company's cloud business for years to come and speaks to a new chapter of Redmond winning in the cloud vs. Amazon," Ives wrote.
But the analyst is also optimistic about competitors because there’s a lot of business to go around as the entire computing universe shifts toward the cloud.
“While the current political landscape further complicated this high-stakes bake off with JEDI, both Microsoft and Amazon among others ... will have much to gain over the coming years in these cloud sweepstakes,” Ives wrote.
Microsoft shares were up 1.3% to $149.97 at Friday's close. Shares of Amazon were down marginally to $1,739.49.
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