Last week, the Army announced that it had signed a $21.9 billion deal with Microsoft (MSFT) to give 120,000 augmented-reality headsets over the next decade. Investors have reacted with enthusiasm, pushing Microsoft stock higher by over 7% since.
But what is the truth behind this deal?
The contract is estimated to be around $21.9 billion and might see Microsoft provide the government with over 120,000 headsets using its HoloLens 2 technology. The deal is for a time of five years with the option for renewal for another five. This means that some part of the $21.9 billion revenue might not be totally secured, but if Microsoft keeps its part of the deal, it is unlikely the Army will back out and be forced to go through another vendor negotiation.
So what is HoloLens 2? It’s Microsoft’s augmented reality headset built for companies. The base headset costs $3,500 with premium headsets going near $5,000. If the deal is for 120,000 headsets, that would mean the Army is paying $182,500 for each one. That is a shocking price bump, but the HoloLens 2 will only be a part of what the military is requesting — they also want an Integrated Visual Augmentation System. The company will also be building these systems to be more rugged and adding a lot of other custom technology and software on top of the standard models, such as night-vision and thermal vision.
Government contracts are complicated
This isn’t Microsoft’s first agreement with the DOD. In late 2019, the company was given the $10 billion JEDI contract to give cloud services to the DOD, a huge defeat of rivals Google and Amazon. However, that contract is being kept in court as Amazon sues to challenge the award, accusing Trump of influencing the choice based on a bias against the e-commerce giant and its founder, Jeff Bezos.
Whatever the end result of the JEDI lawsuit, Microsoft has a foundation and the possibility to bring cloud services to the government while also combining those services with thousands of AR headsets. Plus, if Microsoft lives up to the expectations, it might have a leg up when new contracts come up.
While this $22 billion agreement would be a large sum for most other companies, the deal won’t change things for Microsoft. The company produced $153 billion in the previous year, so another $22 billion spread over the next ten years won’t exactly be game-changing.
However, this contract could be a crucial stepping stone and overall, investors should be pleased with this DOD deal and the momentum it might bring for Microsoft’s future revenue. Even with the company’s shares reaching all-time highs and the company’s market cap at an incredible $1.9 trillion, there’s no reason to sell Microsoft stock soon.
Author: Steven Sinclaire