In the ultimate battle of tech heavyweights in the cloud, it seems that Microsoft Corporation (NASDAQ:MSFT), and Amazon.com, Inc. (NASDAQ:AMZN) are more one with the ‘force’ than Oracle Corporation (NASDAQ:ORCL), Alphabet Inc (NASDAQ:GOOG), and International Business Machines Corp. (NYSE:IBM) . Or at least that’s the Pentagon’s lucrative $10 billion winner take all JEDI contract shows. In this article, let’s analyze how the Pentagon’s $10 billion contract shows who’s who in the cloud and how elite funds such as Soros Fund are positioned in some of the stocks.
Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Not every company no matter how great the resources and how talented the workforce can be number one in the cloud. As the Pentagon’s $10 billion JEDI contract shows, Microsoft Corporation (NASDAQ:MSFT), and Amazon.com, Inc. (NASDAQ:AMZN) are the clear leaders, while Alphabet, Alphabet Inc (NASDAQ:GOOG), International Business Machines Corp. (NYSE:IBM), and Oracle Corporation (NASDAQ:ORCL) might have some catching up to do.
The $10 billion JEDI or Joint Enterprise Defense Infrastructure contract is supposed to bring modern cloud computing to America’s Defense Department. IBM and Oracle have been since disqualified for the contract as the U.S. government reached the conclusion that the companies do not meet the minimum requirements for the contract. Alphabet’s Google dropped out late last year after the company’s new ethical guidelines seemed to conflict with the project. In a statement, Google said it couldn’t be sure that the contract might “align with our AI Principles and second, we determined that there were portions of the contract that were out of scope with our current government certifications.” Some of the companies that dropped out probably didn’t like the winner-take-all format, as it prevents them from offering more potentially cost competitive solutions for parts of the contract.
The winner of the contract will reap a lot of benefits. Not only is $10 billion a big number for Amazon Web Services or Microsoft’s cloud (even if its over a duration of 10 years) but also a win for one company could potentially lead to more wins in the cloud in the future. The winner will also have ‘bragging rights’ as perhaps the industry’s lead cloud company. Although Amazon Web Services leads in infrastructure, Microsoft leads in other potentially more lucrative areas and has increased its sales in the critical industry substantially over the years.
The winner could also be in a good position to win part of the CIA’s massive cloud computing contract which might be worth ‘tens of billions’ to help the agency take advantage of the latest cloud computing tech produced from Silicon Valley. Amazon has won a contract from the CIA in the past, for $600 million. Unlike the winner take all JEDI contract, the CIA’s new contract is multi-vendor. The winner of the JEDI contract could be announced as early as mid-July according to some analysts.
In terms of smart money behavior, George Soros’ Soros Fund exited out of some holdings such as Microsoft in Q4. The fund owned around 16,000 shares of Amazon at the end of December. That’s down 6,100 shares from the prior period. In terms of other holdings, of the around 700-740 elite funds we track, 54 funds owned $5.76 billion of Oracle Corporation (NASDAQ:ORCL) versus 141 elite funds that were long Alphabet Inc (NASDAQ:GOOG) and 48 top funds had a bullish position in International Business Machines Corp. (NYSE:IBM) at the end of 2018.
Disclosure: None
