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Will the loss of the JEDI contact hurt the Microsoft share price?

The Microsoft share price [MSFT] gained 27.6% in the year to 14 July, closing at $282.51. In the year’s opening two weeks its share price fell, closing 15 January 4.4% down on its starting point for the year, but entered a period of sustained growth that saw it close 9.6% up for the year on 18 February.

There followed a tough month and a half for the Microsoft share price, with the stock’s highest close before April coming on 16 March at $237.71. The share price then entered another positive run, seeing gains of 12.5% between 30 March and 16 April, peaking at a close of $261.97 on 27 April.

27.6%

Microsoft's YTD share price rise

  

The Microsoft share price then lost momentum during early May, bottoming out at $239.00 on 12 May, before a sustained period of gains which has seen the stock rise to its current level over a period of two months in which it gained 16%. The run ensures that Microsoft’s share price has gained 36.9% over the past 12 months.

 

JEDI fights

On 6 July the US Department of Defense (DoD) announced it was cancelling a $10bn contract with Microsoft, which had led to legal clashes with big tech rival Amazon [AMZN].

The Joint Enterprise Defense Infrastructure (JEDI) Cloud contract was described by the Pentagon in a press release as no longer meeting the organisation’s needs “due to evolving requirements, increased cloud conversancy, and industrial advances”.

The contract, originally worth $1m, was awarded in 2019 and had initially been intended to run for up to 10 years, but had been extensively delayed before being pulled. Its aim was to replace outdated DoD systems with a single cloud system offering artificial intelligence capabilities to the US military.

$10million

Valuation of Us DoD contract with Microsoft

  

The Microsoft share price fell as much as 1.3% during intraday trading on the day of the announcement, but closed 6 July at $277.66, flat on the previous session’s close.

The Pentagon simultaneously announced a new multivendor Joint Warfighter Cloud Capability contract, which will also require enterprise-scale cloud infrastructure. Both Microsoft and Amazon will be invited to submit proposals for this contract, as these are the only cloud service providers the agency believes can meet its needs.

However, ongoing market research into other potential providers is being carried out, with Google [GOOGL], IBM [IBM] and Oracle [ORCL] representing three promising contenders for parts of the contract, according to Pentagon chief information officer John Sherman.

Amazon previously filed a lawsuit against the original contract which, it asserted, was awarded to rival Microsoft because of then-US president Donald Trump’s personal bias against Amazon and Jeff Bezos, who on 5 July stepped down as Amazon’s CEO. A Pentagon report released in April 2020 found no evidence that the White House had influenced the contract’s award.

While the DoD statement didn’t reference the legal fights that JEDI had prompted, a Microsoft response stated: ‘We understand the DoD’s rationale… The DoD faced a difficult choice: Continue with what could be a years-long litigation battle or find another path forward.”

“We understand the DoD’s rationale… The DoD faced a difficult choice: Continue with what could be a years-long litigation battle or find another path forward” - statement from Microsoft

 

SKYY high

The spat between the two may impact Microsoft’s share price as well as Amazon’s, but it is unlikely to have a major impact on the cloud computing industry as a whole.

Overall the sector is enjoying a positive year, with the First Trust Cloud Computing ETF [SKYY] up 9.8% so far this year (through 14 July). Microsoft is the second-largest holding in the fund with a 3.90% weighting. Amazon is in the top spot, just, with a weighting of 3.93%.

9.8%

First Trust Cloud Computing ETF's YTD returns rise

  

Both Amazon and Microsoft hold much less dominant positions in the Global X Cloud Computing ETF [CLOU], which has gained only 3.2% this year. Microsoft is the 26th holding in with a 2.02% weighting (on 14 July), while Amazon is one position lower, weighted at 1.97%. Top holding Shopify [SHOP] (representing 4.77%) has gained 29.2% in the year to 14 July. Shopify is also held by the First Trust Cloud Computing ETF, with its 2.04% weighting, making it the 18th largest holding.

Over the last 12 months, SKYY has gained 41% while CLOU has gained 32.3%.

Disclaimer Past performance is not a reliable indicator of future results.

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The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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