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Amazon Asks Court to Pause Microsoft’s Pentagon Cloud Contract: Should Investors Be Worried?

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Amazon wants Microsoft to stop work on the Pentagon’s $10 billion JEDI cloud computing contract until its lawsuit is settled.

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Amazon Microsoft Pentagon

Amazon Microsoft Pentagon-Amazon (NASDAQ:AMZN) says it isn’t willing to give up on winning a 10-year, $10 billion Pentagon cloud computing contract it lost to Microsoft (NASDAQ:MSFT) last year. The Pentagon says Microsoft won it fair and square, but Amazon doesn’t agree. The tech giant claims political bias and last week it asked a U.S. federal court to stop the deal from moving forward while it works to settle a lawsuit over how the deal was reached.

Last Wednesday’s court filing sent shares of Microsoft down in after-hours action, as investors worried the software giant could lose the lucrative and door-opening contract. After all, as a distant second-place player in the cloud computing market, Microsoft has a lot more to lose than Amazon Web Services (AWS), Amazon’s cloud computing segment.

Here’s what this latest development means for Amazon and for Microsoft.

How and why the JEDI contract was awarded is in dispute

In its latest salvo, Amazon filed a motion in the U.S. Court of Federal Claims saying that, while it supports the government’s efforts to digitize its systems and consolidate its cloud partners, the process of awarding it needs to be reviewed. It filed a lawsuit in November, arguing Amazon lost the bidding because President Trump viewed Amazon CEO Jeff Bezos as a political foe.

The Joint Enterprise Defense Infrastructure (JEDI) cloud contract is aimed at modernizing the technology systems and consolidating cloud computing across departments in the Defense Department. Because of Amazon’s Central Intelligence Agency cloud contract and its leadership in the market, Amazon was expected to easily win the new deal.

But that expectation changed in August 2019 when the White House reportedly began examining Amazon’s bid. A few months later, the contract went to Microsoft, which sent its shares surging.

Much of Microsoft’s rebirth in recent years has to do with its cloud computing business, which has been driving double-digit growth. Investors tend to react favorably when it wins big contracts, especially at the expense of Amazon. Likewise, they react negatively if there are any hiccups in the business. For its fiscal fourth quarter, Microsoft’s cloud computing sales were up 27% year-over-year, driven by a 59% increase in its Azure cloud sales.

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Article Credit: The Motley Fool

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