Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Government contracts can be game changers even for the biggest and strongest companies on the market. Today, IBM (NYSE: IBM ) is suffering a black eye and a fairly significant share-price plunge as the CIA takes its $600 million cloud-computing contract elsewhere.
IBM has been fighting a public bidding war with Amazon.com (NASDAQ: AMZN ) over this contract since the summer. The back-and-forth between traditional data-services powerhouse IBM and online retailer Amazon saw Amazon winning the bid, IBM asking for a rebidding process, and Amazon suing to stop the rebid.
But it's all over. IBM has withdrawn its latest attempts to derail Amazon's big contract win, and the CIA will get private cloud services from the increasingly data-intensive e-tailer for the next 10 years.
Big Blue's sales topped $100 billion last year, while Amazon's revenue soared past $60 billion. At $60 million a year, the contract is a rounding error for both companies. So, what's the big deal?
Research firm IDG Government Insights says the Department of Defense, of which the CIA is but a small cog, spends about $35 billion a year on information technology. Expand your scope beyond the military and intelligence communities, and you'll find the Federal government shoveling $80 billion a year into IT projects. That's a big deal.
IBM already plays a huge part in this enormous market, but Amazon is a newcomer. Amazon may be a trailblazer and a leader in cloud-computing services, but the company hasn't spent much effort on government opportunities.
IBM shareholders appear to take this potential sea change far more seriously than Amazon's owners do. Or perhaps Amazon investors already priced this outcome into the stock while IBM's owners didn't. Amazon shares have traded sideways today, while IBM is down.
IBM's 0.7% drop has shaved eight points off the Dow Jones Industrial Average (DJINDICES: ^DJI ) , continuing a somber two-quarter trend. IBM shares have plunged 15% since the middle of April, single-handedly taking away 200 Dow points. You can't blame Amazon for all of that, given that IBM is transforming its business model under new management and these things can be painful.
But do note that Amazon shares surged 33% over the same period. The company doesn't break out its data services from the core retail operations in quarterly reports, but it's clear that Amazon is onto something good with this newfangled business line. We might be witnessing a changing of the guard in IT management services -- another long and perhaps painful process, but certainly one worth keeping an eye on.
But for now, IT is just a sideshow for Amazon
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