Cloud Battle Between Microsoft and Amazon Enters New Phase After Judge Orders Suspension of JEDI Contract

Microsoft investors cheered when it was awarded a $10 billion cloud contract by the Pentagon, but a temporary injunction threw a splash of cold water on Microsoft's ambitions for cloud dominance.
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A tug-of-war between Amazon  (AMZN) - Get Report and Microsoft  (MSFT) - Get Report, the two largest players in cloud services, is just getting started. 

On Thursday, a federal judge handed Amazon an early victory in the simmering legal fight over a $10 billion Pentagon contract that was awarded to Microsoft. The judge granted Amazon's request that the Pentagon and Microsoft suspend work on the cloud contract, called JEDI (Joint Enterprise Defense Infrastructure) while conflict over the deal plays out in the courts. Microsoft shares closed at $185.35 on Friday, while Amazon's closed at $2,134.87.

Microsoft investors rejoiced when the company beat out Amazon for the JEDI contract, which involves building and managing cloud infrastructure for the Defense Department over a ten-year period, Analysts speculated that the lucrative deal, which followed a lengthy bidding process by a handful of tech giants, signaled a turning of the tides in the fight for cloud dominance. Amazon's AWS is the leading cloud provider, but Microsoft's Azure has posted strong growth in recent quarters

In Amazon's complaint, it alleged that the Pentagon's process for awarding the contract was tainted by "egregious errors" as well as meddling by President Trump.  

At a press conference last summer, Trump referred to "tremendous complaints" about the bidding process, implying that it was unfairly weighted towards Amazon. Trump has also exhibited a personal animus towards Amazon founder and CEO Jeff Bezos, who also owns the Washington Post newspaper. Soon after Trump's public statement about the bidding process, the Pentagon delayed its decision on the deal, but ultimately awarded the contract to Microsoft. 

"While Amazon will continue to fight 'JEDIgate' in the courts and drag out the inevitable start of JEDI, we ultimately believe this is a paradigm changer deal for Microsoft who will remain the lone winner in this hard fought technology/K Street battle," wrote Wedbush Securities analyst Dan Ives on Friday. 

The decision to delay work on the JEDI project was issued in a sealed opinion by judge Patricia E. Campbell-Smith of the Court of Federal Claims. 

In a statement to various press outlets, Microsoft said it was "disappointed" by the delay, but that it believes it "will ultimately be able to move forward with the work to make sure those who serve our country can access the new technology they urgently require."

Meanwhile, a Pentagon spokesperson said that Thursday's ruling "unnecessarily delayed implementing DoD’s modernization strategy and deprived our warfighters of a set of capabilities they urgently need."

While the JEDI contract's $10 billion value represents a fraction of what AWS is likely to earn over the next decade -- AWS brought in about $10 billion just in Q4 -- federal cloud spending is expected to significantly increase. And successful implementation of the JEDI contract could place Microsoft in a position to capture more of that spending. 

Deltek, an information technology provider specializing in government work, estimated last September that federal cloud spending will surge to $9.1 billion by 2024, up from $5.3 billion in 2019. Demand for modernization and heightened security, as well as bipartisan backing, are driving a surge in cloud spending by federal agencies, analysts at Deltek said. 

“Given the focus on both reducing IT infrastructure and acquisition costs and improving return on investment, contractors with solutions that help agencies meet both of those challenges will be well positioned in this market,” said Deniece Peterson, director of research at Deltek.

Microsoft and Amazon are holdings in Jim Cramer's Action Alerts PLUS member club