By Callum Turcan
Microsoft Corp (MSFT) is a longtime holding in the Dividend Growth Newsletter portfolio and on top of posting great dividend growth historically–from the start of 2010 to the start of 2020, Microsoft’s quarterly dividend rose from $0.13 per share to $0.51 per share, and we see that trajectory continuing going forward–shares of MSFT have been on an upward tear and are up ~73% over the past year as of this writing. Microsoft now trades well above the top end of our fair value estimate range. However, we let our winners run until the technicals start turning against them in a meaningful way. As of this writing, shares of MSFT yield ~1.1% on a forward-looking basis.
Recent Events
On February 13, the news broke that Amazon Inc (AMZN) had successfully won an injunction preventing any further work on the Joint Enterprise Defense Initiative (‘JEDI’) contract that Microsoft had won back in late-2019 with the US Department of Defense (‘DoD’). That deal was worth up to $10.0 billion over ten years, and more importantly, opened a door for Microsoft to secure future upside. Whether that be by extending or expanding the contract, signing new deals with the US DoD, or a combination of both, Microsoft’s growth outlook decently improved after securing that big win (we covered the news and related events in this article here).
What the JEDI contract entails is for the winner, which as of this writing is still Microsoft, to offer cloud computing services to the US military. That includes hosting classified information and more broadly, modernizing the IT infrastructure of the US military.
However, Judge Patricia Campbell-Smith of the US Federal Court of Federal Claims put a wrench in that trajectory, for now, through her ruling. The judge also ruled that Amazon must set aside $42 million should the injunction be found erroneously issued. At the heart of this legal debate is whether the US DoD wrongly gave Microsoft the JEDI contract simply because President Trump didn’t want Amazon to win. However, it’s important to note that Microsoft’s cloud computing offerings are top tier and the company is considered one of the leaders in the space (like Amazon).
According to a report cited by the WSJ, rarely do these types of contested contracts get overturned in the US. Public think tank Rand Corp conducted a study in 2018 that noted US courts changed these types of awards less than 10% of the time when a legal challenge was filed. We’ll be monitoring the situation closely going forward.
Concluding Thoughts
Shares of MSFT continue to be supported by strong technicals and it appears for now that investors are brushing off recent events as it relates to the JEDI contract. Microsoft continues to trade near its all-time highs, and we like the company’s outlook, with or without the JEDI contract.
Software Industry – ADBE ADSK EBIX INTU MSFT ORCL CRM
Related: AMZN, GOOG, GOOGL
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Callum Turcan does not own shares in any of the securities mentioned above. Microsoft Corporation (MSFT) and Oracle Corporation (ORCL) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Alphabet Inc (GOOG) Class C shares are included in Valuentum’s simulated Best Ideas Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.