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Microsoft's $10B JEDI Contract Sends Ripples in the Tech Space

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Microsoft (MSFT - Free Report) was recently reaffirmed by the U.S. Department of Defense (DoD) as the winner for its Joint Enterprise Defense Infrastructure (JEDI) cloud deal. The decision was made following a re-assessment of the submitted bids. Notably, the contract is touted to be worth $10-billion and spread over 10-years.

The massive IDIQ (indefinite-delivery/indefinite-quantity) contract deal will enable DoD to upgrade its technological infrastructure.

For Microsoft, the JEDI deal win holds potential to bolster its position in the cloud computing market and drive top-line growth. Also, the contract could make way for more wins from government and federal agencies.

 

The reconfirmation of JEDI contract win to Microsoft is expected to increase investors’ optimism in the stock in the days ahead. Notably, on a year-to-date basis, shares of Microsoft have returned 35.9% compared with the industry’s rally of 32.2%.

Controversies Galore

There are quite a few bumps in the road ahead for Microsoft.

In October 2019, Microsoft was first awarded the contract by Pentagon. Since then, Amazon (AMZN - Free Report) is striving to prevent Microsoft on working on the contract. The tech giant was granted a preliminary injunction order issued by the Court of Federal Claims on Feb 13, 2020, that does not allow the immediate commencement of the contract performance by Microsoft.

Amazon vehemently opposed the deal being awarded to Microsoft. In a critical blog post, released on Sep 4, the cloud computing giant stated that the awarding of this massive deal to Microsoft sets a “dangerous precedent” and also alleged political bias interfering in the procurement process.

This could mark escalations in legal squabbling for the JEDI contract that has been fiercely disputed since it was floated by DoD in 2018.

Notably, Amazon along with Microsoft, Oracle (ORCL - Free Report) , Alphabet’s Google, and IBM Corp. (IBM - Free Report) were some of the final bidders for the JEDI deal. However, Alphabet had pulled out the race, quite early, due to the conflict with its corporate values. Ultimately, Microsoft and Amazon were selected by Pentagon as the final two contenders which did not go down well with Oracle.

Oracle filed several lawsuits but has been repeatedly facing setbacks. Recently, Oracle faced another setback when the U.S. Court of Appeals rejected its contention that the JEDI federal procurement process was unfair. In July 2019, the company’s claims of JEDI cloud contract infringing on procurement laws was quashed by Federal Claims Court.

Coming to Microsoft’s selection, the company has made the hybrid approach crucial to its cloud strategy that is expected to help the DoD in its mission-critical operations. Also, Microsoft has previously collaborated with DoD numerous times in varying degrees that may have facilitated Microsoft’s selection.

Efforts to Bolster Azure Capabilities Bode Well

Microsoft is strengthening Azure capabilities with investments in technologies like Kubernetes and GitHub Actions with an aim to automate the process of checking code and deploy containerized applications, and web applications. This is expected to be a strong driver for Azure cloud adoption going ahead.

In fact, Microsoft Azure is gaining ground in the cloud space and trails only Amazon Web Services (AWS). Per a Canalys Report, for the second quarter of 2020, Microsoft’s market share in the cloud services space increased to 20% from 18% in the prior-year quarter. AWS market share remained unchanged at 31% for the second quarter of 2020 on a year-over-year basis.
Moreover, in the fourth quarter of fiscal 2020, Azure revenues soared 47% on a year-over-year basis.

Also, the company will benefit from rapid migration to cloud by enterprises across the globe, triggered by coronavirus crisis. Per a MarketsandMarkets report, cloud computing market is expected to witness a CAGR of 17.5% between 2020 to 2025.

Microsoft’s cloud initiatives are expected to aid it in capitalizing on alluring growth prospects and benefit its financial performance in the coming days. 

Microsoft currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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