Please ensure Javascript is enabled for purposes of website accessibility

What Microsoft's New $22 Billion Government Contract Means for Its Stock

By Brett Schafer - Apr 8, 2021 at 6:10AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The tech giant has just landed a blockbuster deal for its augmented reality goggles.

Last week, the U.S. Army announced that it had finalized a $21.9 billion deal to have Microsoft (MSFT -0.40%) provide 120,000 augmented-reality (AR) headsets for its troops over the next 10 years. Investors have responded enthusiastically, bidding Microsoft stock up by more than 7% since the announcement.

But what will this deal really mean for Microsoft? 

A man wearing AR glasses that is also touching the rim of his glasses.

Image source: Getty Images.

The deal

The contract is worth upwards of $21.9 billion and could see Microsoft sell the government more than 120,000 headsets based on its HoloLens 2 hardware. The deal is good for an initial period of five years with the option for the Army to renew it for another five years. This means that some portion of that $21.9 billion in revenue may not be guaranteed, but as long as Microsoft holds up its end of the deal, it's unlikely the government will back out five years in and go through another arduous implementation process with a different vendor.

So what is the HoloLens 2? It is Microsoft's AR headset built for enterprise customers. The standard headset goes for a whopping $3,500 with premium versions costing upwards of $5,000. Assuming the deal is for 120,000 devices as the rumors say, that would mean the government is paying $182,500 for each unit. That's a huge price bump, but the HoloLens 2 will only be the core of what the military is asking for -- an Integrated Visual Augmentation System (IVAS). The company will be making the systems more rugged and adding a lot of custom hardware and software features on top of the standard model, such as thermal and night-vision sensors.

Government contracts can carry complications

This isn't Microsoft's first contract for the Department of Defense. In late 2019, the company was awarded the $10 billion JEDI cloud contract to provide cloud computing services to the Department of Defense, a huge win over rivals Amazon and Alphabet. However, that contract is being held up in court as Amazon has sued to challenge the award, accusing former President Trump of influencing the decision due to a bias against the e-commerce company and its founder and CEO, Jeff Bezos. 

Whatever the outcome of the JEDI litigation, Microsoft has a solid footing and the potential to bring cloud services to the U.S. government while also integrating those services with tens of thousands of augmented-reality devices. Plus, if Microsoft lives up to the government's expectations, it may have a leg up when new cloud, software, and hardware contracts come up in the future.

What it means for the stock

While $10 billion and $22 billion deals would be large figures for almost any other company, these deals won't move the needle significantly for Microsoft. The company generated $153 billion in the past 12 months, so an additional $32 billion spread out over a decade won't exactly be game-changing.

However, the augmented-reality contract could be an important stepping stone if it helps build momentum for mainstream AR adoption in other industries like healthcare, construction, or manufacturing. Remember, each HoloLens 2 costs thousands of dollars, so for every million headsets that Microsoft sells, that is billions in new revenue flowing to the top line, before counting any software add-ons.

Facebook, Apple, and other companies might eventually duke it out for dominance in the consumer segment of the AR and VR (virtual reality) markets, but Microsoft looks to be all alone out front when it comes to enterprise and work-based AR. 

Overall, investors should be happy with this Defense Department contract and the momentum it could build for Microsoft's future business. The deal has the potential to springboard its AR devices into the mainstream, adding another pillar to Microsoft's cloud, software, and hardware ecosystems. Even with the shares hitting all-time highs and the company's market cap at a remarkable $1.9 trillion, there's no reason to sell Microsoft stock anytime soon. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, 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. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Brett Schafer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, and Microsoft. The Motley Fool recommends the following options: long January 2022 $1920.0 calls on Amazon, long March 2023 $120.0 calls on Apple, short January 2022 $1940.0 calls on Amazon, and short March 2023 $130.0 calls on Apple. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
$290.17 (-0.40%) $-1.15
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$174.66 (-0.11%) $0.19
Alphabet Inc. Stock Quote
Alphabet Inc.
$120.17 (0.52%) $0.62
Apple Inc. Stock Quote
Apple Inc.
$174.15 (-0.23%) $0.40, Inc. Stock Quote, Inc.
$142.30 (0.14%) $0.20
Alphabet Inc. Stock Quote
Alphabet Inc.
$120.86 (0.45%) $0.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.