Microsoft: Let’s Shed Some Light on That US Army Contract

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  • Mark Murphy
    American football player, executive, college athletics administrator

Microsoft’s (MSFT) business dealings with the US military just became a whole lot more lucrative. On Wednesday, it was reported that the tech giant has won a contract to supply the US army with augmented reality headsets based on the company’s HoloLens product.

The deal for 120,000 headsets is purportedly worth up to $21.9 billion over 10 years. In a blog post, Microsoft has said the project is now transitioning to production from its prototyping phase. The AR system will let soldiers share information and decision-making and provide a safer and more effective operating environment.

J.P. Morgan’s Mark Murphy is “very surprised by the potential magnitude of the contract.”

“For perspective,” the 5-star analyst said, “We believe Microsoft’s prior largest Azure contract wins have landed in the realm of $1.65B over 5 years and have since expanded closer to $2.65B over 5 years, equating to roughly $500M annually. Also, the DoD JEDI contract awarded in 2019 was reportedly up to $10B over 10 years, or $1B per year. While there is no guarantee that the US Army project will realize its full reported potential of $2.2B per year, the potential scale is massive.”

Murphy also expects Microsoft’s cloud computing service Azure to have a meaningful role.

A back of the envelope calculation shows that 120,000 HoloLens devices at a price of $5,000 each, generates revenue of just $600 million, amounting to less than 3% of the reported contract’s value. However, Microsoft’s blog post highlighted the fact HoloLens are “augmented by Azure cloud services,” which Murphy believes indicates that the contract’s size “could largely relate to Azure services for remote rendering, spatial anchors and other mixed-reality engines.”

Overall, Murphy rates MSFT shares an Overweight (i.e. Buy). But the analyst might as well have said Hold — because his price target, currently at $245, implies a modest upside of just 1%. (To watch Murphy’s track record, click here)

The rest of the Street has a more exuberant outlook. Going by the $279.33 average price target, shares are anticipated to appreciate by ~15% in the year ahead. Rating wise, all analysts are on the same page; Microsoft’s Strong Buy consensus rating is based on a unanimous 23 Buys. (See Microsoft stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.