CNBC recently reported that the Pentagon was going to stick with Microsoft over the $10B JEDI cloud services contract. This made me think about the impact of such press attention on the value of a stock.
To put this into context, looking at MSFT’s 2019 annual report, they made $129Bn in revenue. $10Bn over 10 years (assuming an average of $1Bn per year) is less than a 1% revenue increase of the total revenue of MSFT (in 2019). IMHO I suspect winning the contract will be more good PR than a significant impact on the bottom line of MSFT.
And this leads me to a murky indicator of value in a stock. If lots of people see a report showing a company has won a victory over a competitor (Amazon being the vanquished foe here) and see a big number “10 Beelion dollars” it is common to think that there is value to be had in the stock of the victorious company. This might lead people to buy the stock and push the price up.
As can be seen. the relative value of this contract to Microsoft is small compared to Microsoft’s total business but it does suggest Microsoft’s ongoing relevance in the cloud business and Amazon’s vulnerability (in this case I think political). While you could just look at the forward cash flow potential of Microsoft and say yes it justifies a small increase in stock price, it may not justify a significant bump. This might give the shrewd analyst of the stock cause to buy and sell the stock to take some of this profit.
The problem? Consumer sentiment is fickle and hard to predict, probably more so than short term cash flows. In my personal opinion, I try to stick to the financial fundamentals when analyzing the potential performance of a company, if you can predict/track consumer sentiment you are a braver/more knowledgable investor than I.
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