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Microsoft’s JEDI Win May Open ‘Floodgates’ For Cloud Growth

Analysts wrote that while the dollar-amount of the deal made it “inconsequential” for Microsoft’s near-term results, it still represented a milestone for its fast-growing cloud business.

(Bloomberg) -- Microsoft Corp. shares jumped to an all-time high on Monday, after the company secured a $10 billion Pentagon contract for cloud-computing services, beating out Inc., which had recently been seen as the favorite to win.

Analysts wrote that while the dollar-amount of the deal made it “inconsequential” for Microsoft’s near-term results, it still represented a milestone for its fast-growing cloud business. The Joint Enterprise Defense Infrastructure award -- or JEDI -- potentially opens the “floodgates” for other government contracts, in the words of Bloomberg Intelligence, even as Amazon is expected to protest.

Shares of Microsoft spiked as much as 3.1% to an intraday record, while Amazon fell 0.8%. Thus far this year, Microsoft has risen more than 40% while Amazon is up about 17%.

Here’s what analysts are saying about the contract:

Citi, Walter Pritchard

The “numbers impact is inconsequential,” with only a minimal contribution to Microsoft’s annual earnings expected. “This, combined with the fact the contract was awarded in a highly politically charged environment, makes the long-term impact of the award less of a tangible driver” than previously expected.

The key will be whether Microsoft receives any follow-on awards or traction at other agencies. So far, Amazon “appears to have a substantial lead” in public cloud adoption, but “a trend towards more centralized procurement of cloud as well as hybrid purchasing does put Microsoft on an even or better footing.” At the same time, innovation at Amazon Web Services (AWS) “keeps those that prioritize innovation coming Amazon’s way.”

Deutsche Bank, Karl Keirstead

This “could be the largest cloud contract award in history,” and it represents “a huge upset victory over Amazon Web Services.”

Affirms buy rating on Microsoft, raises price target to $160 from $155.

Stifel, Brad Reback

This “great win” for Microsoft “validates Azure as a leading hyperscale cloud and signals that Azure continues to gain ground on AWS.”

There is “plenty of opportunity for similar size (or even larger) deals like this available across enterprises,” and over time, “Azure has the potential to be Microsoft’s largest revenue stream and profit pool.”

Buy rating and $160 price target on Microsoft.

Oppenheimer, Matt Wilson

This puts Microsoft “in the pole position to win other government and enterprise contracts.”

While “politics likely played a key role” in the decision to choose Microsoft over Amazon, it is still “evidence of the progress MSFT has made to catch up to AWS, which had a multi-year head start.”

JMP Securities, Ronald Josey

Microsoft’s win “highlights just how competitive the cloud market is becoming,” and will likely help the company build out its public-sector business. “That’s the longer-term concern for AWS.”

Expects Amazon “to vigorously protest this contract,” a process that could last years.

Despite not winning, Amazon “remains the leader in terms of size, scale, and, importantly, innovation across the cloud space.” Would take advantage of any “significant dislocation” in Amazon shares as a result of this announcement.

Affirms market-outperform rating and $2,250 price target on Amazon shares.

Cowen, Nick Yako

The award “will likely have significant implications in terms of the [long-term] trajectory of [Microsoft’s] Azure business,” as the contract’s potential “represents significant upside” relative to the current size of the business.

“The animus between President Trump and Amazon CEO Jeff Bezos raises the level of intrigue,” and given the political elements, “we would not firmly count this in the Microsoft win column until the protest window has closed at the Government Accountability Office.”

Bernstein, Mark Moerdler

“While the initial revenue generated by the contract will be reasonably small,” the overall impact on Azure “could be quite significant.”

Outperform rating, $167 price target on Microsoft.

Wedbush, Daniel Ives

This is “a paradigm changer for Microsoft,” a “landmark win that will change the cloud computing battle over the next decade. It’s a shocker to Amazon and Bezos to lose it.”

What Bloomberg Intelligence Says:

The contract is “likely to open [the] floodgates” in terms of Microsoft’s potential government awards. The win “gives it key new opportunities in the federal market, but also with state and local governments across the globe, where use is significantly behind commercial counterparts.”

- Analyst Anurag Rana

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