Amazon.com, Inc. (NASDAQ:AMZN) Not Happy

Amazon.com, Inc. (NASDAQ:AMZN) Not Happy

Amazon.com, Inc. (NASDAQ:AMZN) Not Happy

Microsoft (NASDAQ:MSFT) has been on a roll the past year as everything it touches seems to turn to gold. As a result, Microsoft stock has generated a one-year total return of 57%, almost four times greater than Amazon (NASDAQ:AMZN), its biggest rival in the race to dominate the cloud. 

In late October, Microsoft slew the Amazon Web Services dragon, winning the Department of Defense’s $10 billion Joint Enterprise Defense Infrastructure contract. Better known as JEDI, even the staunchest of Microsoft supporters were surprised by the DOD’s decision. 

“Most people in the industry were really surprised by this announcement as everyone was expecting Amazon to win the JEDI contract,” MSPoweruser.com stated in October. “This is huge news for the Microsoft Cloud platform. Even though $10 billion is a significant amount of money, the network effect that will be created for Azure through this contract will be more significant.”

Amazon’s Not Happy

However, more surprised by the decision were the people at AWS, who felt Amazon’s cloud offering was superior to Microsoft’s. 

“When you have a sitting president who’s willing to be very vocal that they dislike a company and the CEO of that company, it makes it difficult for government agencies, including the DoD to make objective decisions without fear of reprisal. And I think that’s dangerous and risky for our country,” AWS chief Andy Jassy told CNBC in December.

Two months later, AWS is fighting back. On Jan. 22, Amazon reported that it had filed a motion to stop Microsoft from working on the JEDI contract until after the courts have rendered their opinion on the fairness of the DOD awarding Microsoft the contract. 

From one perspective, a $10 billion contract over as many as 10 years isn’t a whole lot for two companies whose combined trailing-12 month revenues were a staggering $394 billion; it does seem like a minuscule piece of business, hardly worth fighting over. 

However, this is about bragging rights in the cloud space, and more importantly, the business it will bring as a result. While it’s hard to know how many billions in revenue will be generated from other companies and government agencies as a result of the winner carrying out the requirements of this multi-year contract, it undoubtedly will many times the size of JEDI.

The stakes are that high. Hence, Amazon’s latest move. Investors must now wait for the courts to deal with the issue. 

Could a reversal hurt Microsoft stock? Yes and no. Here’s why.

Why Courts Overturning Decision Hurts Microsoft Stock

As we sit here today, AWS has a 38% market share in the global cloud market. Microsoft sits in second with 18% market share and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) sits in third with about 8%. After that, it drops off quite significantly. 

The estimate for the global cloud market is expected to grow to $355 billion in revenue by the end of 2022, up from $266 billion at the end of this year. Based on 18% for Microsoft, that translates into cloud revenue of $48 billion in 2020. 

Assuming it generates $1 billion a year from the JEDI contract, losing it would reduce its 2020 sales by 2%, nothing more than a blip in its growth. However, more importantly, it could drastically alter the landscape heading to 2022’s projected $355 million in global cloud revenue.

If both companies maintain their level of market share over the next three years, Microsoft would finish 2022 with $64 billion in cloud revenue while AWS would come in at $135 billion.

But as I said earlier, the ultimate winner of JEDI should benefit significantly from future contracts by large businesses impressed by the DOD’s confidence in either of the two.

So, it’s possible that instead of $135 billion and $64 billion in annual cloud revenues from Amazon and Microsoft in 2022, the numbers change, with Amazon picking up an additional 5% market share to $153 billion and Microsoft’s drops to $46 billion as a result of a 5% drop in market share.

In this scenario, Microsoft’s estimate for annual cloud revenues in 2022 would drop by 28%. That not only would be a kick in the teeth for Microsoft, but it would encourage Google and the rest of the large caps trying to capture market share. 

Suffice to say, Satya Nadella needs to find some pretty good lawyers to fight this case.   

It Makes Microsoft Look Like the Good Guy

Last October, I explored seven reasons to buy Microsoft stock. One of the reasons I listed was CEO Satya Nadella and the job he’s done, making the company relevant again. It has been one of the better chief executive stints in American corporate history. 

Once upon a time, Microsoft was viewed as an organization sadly behind the times. Now, it seems everything Microsoft decides to focus on turns to gold. Microsoft Teams being the latest example. 

To top things off, Nadella just announced that Microsoft would be carbon negative by 2030. Not neutral, but negative. 

”No one company can solve this macro challenge alone, but as a global technology company, we have a particular responsibility to do our part. That’s why today, we’re announcing an ambitious new plan to help address the sustainability of our planet. Today we’re making the commitment that by 2030, Microsoft will be carbon negative,” Nadella stated. 

Microsoft’s CEO is leading the charge of companies committed to doing well by doing good. Amazon, by comparison, pays lip service to this kind of thing. For Jeff Bezos to push for a reversal of the contract award, it looks like Amazon is committed to being the poor sport of the two companies.

Whatever happens in this legal battle, I believe Microsoft comes out smelling like roses. If they do lose the contract and the stock drops, I would load up the truck and buy its stock with both hands.

This is a positive, dressed up as a negative. Don’t let it shake you out of your position.

Technical Indicators

Overall, the bias in prices is: Upwards.

The projected upper bound is: 1,922.12.

The projected lower bound is: 1,804.76.

The projected closing price is: 1,863.44.

Candlesticks

A big black candle occurred. This is bearish, as prices closed significantly lower than they opened. If the candle appears when prices are “high,” it may be the first sign of a top. If it occurs when prices are confronting an overhead resistance area (e.g., a moving average, trendline, or price resistance level), the long black candle adds credibility to the resistance. Similarly, if the candle appears as prices break below a support area, the long black candle confirms the failure of the support area.
During the past 10 bars, there have been 1 white candles and 9 black candles for a net of 8 black candles. During the past 50 bars, there have been 22 white candles and 28 black candles for a net of 6 black candles.

Three black candles occurred in the last three days. Although these candles were not big enough to create three black crows, the steady downward pattern is bearish.

Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.

Stochastic Oscillator

One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 50.0271. This is not an overbought or oversold reading. The last signal was a buy 5 period(s) ago.

Relative Strength Index (RSI)

The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 51.63. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 14 period(s) ago.

Commodity Channel Index (CCI)

The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is -102.This is an oversold reading. However, a signal isn’t generated until the indicator crosses above -100. The last signal was a sell 11 period(s) ago.

MACD

The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a sell 7 period(s) ago.

Rex Takasugi – TD Profile

AMAZON COM closed down -22.940 at 1,861.640. Volume was 21% above average (neutral) and Bollinger Bands were 42% narrower than normal.

Open     High      Low     Close     Volume___
1,891.3701,894.9901,847.4401,861.640 3,766,181
Technical Outlook 
Short Term: Neutral
Intermediate Term: Bullish
Long Term: Bullish
Moving Averages: 10-period     50-period     200-period
Close: 1,877.43 1,811.96 1,833.56
Volatility: 16 20 24
Volume: 3,181,745 3,177,728 3,451,476

Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.

Summary

AMAZON COM is currently 1.5% above its 200-period moving average and is in an upward trend. Volatility is high as compared to the average volatility over the last 10 periods. Our volume indicators reflect volume flowing into and out of AMZN.O at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bullish on AMZN.O and have had this outlook for the last 23 periods.

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