Many Amazon (AMZN +2.02%) shareholders probably have two words in mind for 2022: Good riddance. Shares of the e-commerce and cloud-computing giant have plunged nearly 50% this year. It was Amazon's worst decline since the financial crisis of 2008 and 2009.
However, Uncle Sam recently gave the company some good news. Could that multibillion-dollar bonanza boost Amazon's stock?
NASDAQ: AMZN
Key Data Points
Four tech giants on cloud nine
The U.S. Department of Defense announced last week that it was awarding a contract of up to $9 billion to be split among four tech giants -- Amazon, Alphabet, Microsoft, and Oracle. These companies will be tasked with helping the Pentagon build "enterprisewide, globally available cloud services across all security domains and classification levels" referred to as the Joint Warfighting Cloud Capability.
Sound like a big undertaking? It is. The Department of Defense estimates that it will take more than five years to finish, with an estimated completion date of June 8, 2028.
What's not clear at this point is how the multibillion-dollar project will be divvied out to each of the four companies. However, it seems unlikely that any one of them will receive the lion's share of the $9 billion.
The Department of Defense caught flak previously for awarding a $10 billion cloud contract to Microsoft. That deal was eventually canceled by the Pentagon. The contract announced last week appears to give Defense a way to minimize the chances of political heat by allowing four cloud companies to share in the spoils.
A boost for Amazon?
The late Sen. Everett Dirkson of Illinois is reputed to have once quipped, "A billion here, a billion there, and pretty soon you're talking real money." It's uncertain whether or not he really said that, but regardless, $9 billion should qualify as real money for any company. You'd think that one-fourth of that amount (assuming the Pentagon splits the contract on a relatively equal basis among the four companies) would do so as well.
But will this potential bonanza really boost Amazon stock? It certainly hasn't so far. The company's shares are down a little since the Dec. 7 announcement.
Amazon isn't an outlier. All four of those cloud stocks have fallen in the days following the big contract news. The reality is that splitting a $9 billion deal simply isn't enough to move the needle all that much for Amazon or its cloud-hosting rivals.
Consider that Amazon generated over $127 billion in net sales in the third quarter alone. The company's revenue should easily top $500 billion this year. Even if Amazon received the entire $9 billion from the Department of Defense, that would be less than 2% of the company's annual revenue.
A bonanza for investors
To be sure, the latest Pentagon contract is good for Amazon. If nothing else, the award ensures that the company won't be elbowed out of the way by one of its competitors. However, this deal hasn't and won't provide a meaningful catalyst to Amazon's beaten-down stock.
There could be a bonanza for investors, though, with Amazon. The Oxford Learner's Dictionary defines a bonanza as "a situation in which people can make a lot of money or be very successful." I think this describes the current scenario for Amazon itself.
Many investors have soured on Amazon because the company's growth has slowed considerably. But a lot of its problems are due to the current macroeconomic environment. Things will almost certainly get better in the not-too-distant future. They always have in the past.
Some of Amazon's issues relate to its heavy spending. The good news on that front is that management is now focused on controlling costs.
Meanwhile, Amazon is cheaper based on projected free cash flow than it has ever been. If you're looking for a situation where you can potentially make a lot of money down the road, this stock offers one. Forget the Pentagon contract -- Amazon itself is the real bonanza.
