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What Could the Latest JEDI Contract News Mean for Amazon?

By Adria Cimino – Feb 19, 2020 at 1:52PM

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It was a non-event for the shares and further developments may result in the same lack of excitement.

Amazon.com's (AMZN 2.55%) cloud-computing business scored an initial victory last week when a federal judge issued an order to pause Microsoft's (MSFT 3.37%) work on a $10 billion contract with the government. Amazon Web Services (AWS), considered a front-runner to win the Joint Enterprise Defense Infrastructure (JEDI) contract with the Pentagon, lost the deal to rival Microsoft in the fall and subsequently filed a lawsuit. This latest news is positive for Amazon. But what might an ultimate win or loss mean for the company?

First a bit of background. Many thought Amazon would win the JEDI contract because AWS previously held a contract with the CIA and had been the only cloud-computing business with clearance to store top-secret data in the cloud. According to a Reuters report, Amazon's lawsuit claims the Pentagon's decision was a result of "improper pressure" from President Donald Trump. The president has repeatedly criticized both Amazon and its founder and CEO, Jeff Bezos. The suit says Trump's actions were "to harm his perceived political enemy."

A gavel sits atop a laptop computer.

Image source: Getty Images.

Two potential positives

So what could a win mean for Amazon? Considering the contract's value and the fact that AWS made about the same amount ($9.95 billion) in net sales in just the fourth quarter, winning this contract would not be a make-it-or-break-it event for the business. Still, beyond the general thrill of victory, there are two meaningful positives that would result.

Here's the first: Though this contract isn't huge compared to what AWS makes in a year, government spending on cloud computing is rising. Information solutions company Deltek predicts federal cloud-computing spending will grow at a compound annual growth rate of 9.6% to reach $9.1 billion in 2024. The JEDI contract could set the current winner up for steady government work, always a nice addition to a portfolio of contracts.

The second positive? AWS has a place as the industry leader, and a victory with this contract could burnish its image. If Amazon prevails and a judge rules that the Defense Department has acted unfairly, as the government's credibility drops, AWS' could rise. And Amazon might be admired as the company that fought government unfairness and won.

What if AWS doesn't win?

Now let's talk about a possible defeat. First of all, as part of the recent decision to block Microsoft's work on the project, Amazon was told to set aside $42 million in case it's determined that injunction was issued wrongfully. Whether Amazon wins or loses, involvement in a lawsuit will cost the company time and money. However, since AWS brought in $35 billion in annual sales in 2019, the possible penalty as well as legal fees should have a limited impact on Amazon overall. The worst result of a defeat might be one related to image, but even that probably wouldn't have too big of an impact. Some may look at Amazon as a sore loser that took on an unjustified fight. Would this hurt AWS revenue and, eventually, the Amazon share price? That would be highly unlikely.

The scenarios of victory and defeat have a major point in common: Neither are game-changers for Amazon. As the media released news of the injunction, Amazon's shares didn't rally as one might have expected. Instead, they hardly moved. It's likely that if Amazon won the actual case, the shares would gain, but there are plenty of stronger catalysts that move the stock more frequently, such as the company's earnings reports. As for a possible loss, well, AWS lost the contract to Microsoft on Oct. 25, and Amazon shares... guess what?... hardly moved.

The JEDI contract and lawsuit so far haven't given Amazon investors reason to cheer or cringe. And judging by what there is to gain and what there is to lose, that may continue to be the case.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Adria Cimino has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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