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Microsoft (MSFT) Secures Contract Worth $480M From U.S. Army

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Microsoft (MSFT - Free Report) recently secured a U.S. army contract, worth $480 million. The robust augmented reality (AR) capabilities of HoloLens are anticipated to enable U.S. army soldiers to combat real-life challenging conditions.

In a bid to provide headsets befitting the requirements to deal with both live combat and training purpose, HoloLens will be enhanced with thermal sensing, scrutinize concussions, hearing protection and night vision features, among others.

The U.S. army anticipates the contract winner to furnish at least 2,500 headsets over a two-year period, with a capacity of full-scale production. Per reports, the contract is likely to eventually lead to order of more than 100,000 HoloLens headsets.

Microsoft is optimistic regarding this association with the U.S. Department of Defense. The company’s spokesperson noted in an e-mailed statement to Bloomberg, "Augmented reality technology will provide troops with more and better information to make decisions.”

We may note that Magic Leap, which competes with HoloLens in the direct consumer market, reportedly tried its luck bidding for the same contract.

What’s Working in Microsoft’s Favor?

Microsoft’s HoloLens offers mixed reality (MR) technology and has gained significant adoption among developers, ranging from defense (US army, Israel army), healthcare, architecture, construction industries to scientific research domain. Notably, the term “mixed reality”, coined by Microsoft, implies a merger of AR and Virtual Reality (VR) technologies.

Currently, Microsoft is exploring various use cases of HoloLens. Recently, the company fortified its presence in the MR space by introducing the Dynamics 365 Remote Assist and Dynamics 365 Layout. This move is in line with its efforts to strengthen the Dynamics 365 (D365), offering HoloLens MR glasses. Microsoft intends to get ahead of the curve by adding innovative MR techniques in the CRM and ERP domains with HoloLens MR glasses in D365.

Increasing spending on AR/VR tech presents alluring market opportunities. Market research firm, IDC, projects global spending on AR/VR to witness a five-year CAGR of 71.6%, between 2017 and 2022. Moreover, spending on AR/VR products and services is expected to reach $27 billion in 2018.

Further, IDC forecasts the overall AR and VR headset market to grow 6% year over year to 8.9 million units in the current year. Unit growth is projected to finally reach 65.9 million units by 2022.

In addition, the increasing spending on defense in the company’s budget bodes well. The fiscal 2019 defense budget of $717 billion — the largest budget allotted to defense in U.S. history — highlights the country’s efforts in maintaining a solid security cover, with rivals like China and Russia.

Lately, Microsoft ramped up its Azure Government Portfolio, increasing support to various cloud services for the government. Notably, the developments are likely to aid Azure in securing Pentagon’s Joint Enterprise Defense Infrastructure (“JEDI”) cloud contract. The 10-year contract is estimated to be worth $10 billion.

We believe Microsoft’s focus on improving its products with emerging technologies, including AR, VR or MR, Internet of Things (IoT), artificial intelligence (AI), among others is helping the company explore new use cases for its offerings. These initiatives, in turn, assist in winning contracts, including the one under review, which are anticipated to boost top-line growth, going forward.

The aforementioned factors are expected to help the company compete against fellow industry giants, such as Amazon (AMZN - Free Report) and Alphabet (GOOGL - Free Report) .


Zacks Rank & Other Key Pick

Microsoft carries a Zacks Rank #2 (Buy), at present.

Intel (INTC - Free Report) is another top-ranked in the broader Computer & Technology sector, flaunting a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The expected long-term earnings growth rate for Intel is currently pegged at 8.4%.

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