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Microsoft Stock JEDI Win Worth Much More Than $10 Billion

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Wayne Duggan
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Last week, the U.S. Department of Defense awarded Microsoft (NASDAQ:MSFT) the coveted $10 billion Joint Enterprise Defense Infrastructure (JEDI) cloud services contract. MSFT stock got a nice boost from the headline.

Microsoft Stock JEDI Win Worth Much More Than $10 Billion
Microsoft Stock JEDI Win Worth Much More Than $10 Billion

Source: Pit Stock / Shutterstock.com

Most of the world was shocked the contract didn’t go to early favorite Amazon (NASDAQ:AMZN). However, I saw this “surprise” coming a mile away.

How Microsoft Beat Amazon

Amazon is the market share leader in cloud services. But back on July 17, I wrote that there is no way President Donald Trump is going to let Amazon land such an important deal under his watch.

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“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,” I wrote at the time.

As it turns out, Microsoft landed the deal. In fact, it went down exactly like I suspected. Trump reportedly told Secretary of Defense James Mattis to “screw Amazon” out of the JEDI contract due to his personal animosity toward Amazon CEO Jeff Bezos.

Regardless of how Microsoft ended up with the JEDI contract, now is the time for the company, and MSFT stock, to shine.

How Much Is JEDI Worth?

The reported price tag of JEDI is $10 billion. However, Wedbush analyst Daniel Ives estimates the true long-term value of JEDI over the next five years could be closer to $100 billion.

“Outside of JEDI and the flagship DOD cloud initiatives there are a slew of new cloud projects that will focus on migrating the U.S. government’s 6,000+ data centers into a gargantuan cloud based architecture over the coming years,” Ives says.

The government will likely not want to mix and match its cloud providers. Ives suggests many of these government contracts outside of the DOD will likely start to fall to Microsoft as well.

If JEDI is worth $100 billion over the next five years, how much could it be worth over the next 10 years or 20 years if Microsoft becomes the official cloud provider for the U.S. government? The possibilities are mind-boggling. But the true value of JEDI doesn’t necessarily end in D.C.

Microsoft has been scrapping and clawing to gain market share from Amazon for years after Amazon jumped out to a huge lead in cloud. The same week Microsoft scored the JEDI win, Amazon reported 34.7% Amazon Web Services revenue growth. Microsoft reported 59% Azure cloud revenue growth.

For companies looking to compare and contrast the two services in terms of capabilities and security, the vote of confidence of the Department of Defense may go a long way for Azure. Other customers will see the DOD chose Microsoft. That headline is better than any celebrity endorsement on a TV commercial or any pitch from an Azure salesman.

Not Too Late to Buy MSFT Stock

MSFT stock already has a $1.09 trillion market cap. The MSFT stock price is already up over 41% year-to-date. But Bank of America analyst Kash Rangan says Microsoft stock has multiple long growth drivers ahead, and JEDI is a major feather in its cap.

“We believe the DOD contract puts MSFT in a better position to compete against other cloud providers on future contracts,” Rangan says.

Bank of America projects Azure revenue will grow from $13.6 billion in fiscal 2019 to $56 billion by fiscal 2023.

“In our view, the department of defense (DOD) JEDI Cloud contract win announced on Oct 25, 2019 is a strong endorsement of MSFT’s capabilities, reinforcing our conviction in our long term Azure estimates,” said Rangan.

Rangan says MSFT stock provides investors with a unique combination of growth from its cloud business, high margins from its legacy business, and an attractive valuation due to its diversification. Bank of America has a “buy” rating and $162 price target for MSFT stock.

Takeaway on Microsoft Stock

For a $1 trillion company, a $10 billion contract may seem like a drop in the bucket. Don’t let the headline number fool you.

JEDI is worth much more to Microsoft’s brand and to its future than $10 billion. It will certainly be worth more to MSFT stock investors over time.

In a best-case scenario, JEDI will serve as a potential turning point for Microsoft stock as the company continues to duke it out with Amazon for cloud supremacy.

Sure, Microsoft stock may not be as trendy of an investment as the latest IPO or the newest buzzword technology. But if Microsoft ultimately ends up surpassing Amazon as the go-to cloud services provider, MSFT stock could enjoy tremendous long-term upside.

As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.

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