GOOG Stock: What the $10-Billion Pentagon Contract Means for Google

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GOOG Stock Jumps on Q2 Earnings

As we come to the end of earnings season, tech stocks are a mixed bag: some are flying high, while others (I’m looking at you Mark Zuckerberg!) are coming apart at the seams.

Shareholders of Alphabet Inc (NASDAQ:GOOG)—also known as Google—have nothing to worry about though, since GOOG stock is squarely in the former camp.

Shares jumped five percent after the company’s recent earnings release, thanks in part to Google’s slow crawl away from depending on advertising revenues. The company knows it can’t rely on that golden goose forever.

The political climate has changed. A recent survey shows that 75% of Americans won’t buy from a company if they don’t trust the company to protect their data. 60% say they’re more worried about cybersecurity than a potential war. (Source: “New Survey Finds Deep Consumer Anxiety over Data Privacy and Security,” PR Newswire, April 16, 2018.)

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Let that simmer for a moment.

With all this fear and anxiety of data, it’s hardly surprising that regulators want to rewrite the rules of online advertising. Europe struck the first blow this summer with its General Data Protection Regulation (GDPR), and it’s likely that American regulators will follow suit.

But Google saw this coming. In recent years, the company invested billions of dollars into “Other Bets” like autonomous driving and cloud computing.

Now those bets are starting to pay off and GOOG shareholders find themselves insulated from the rising backlash against technology stocks.

Just look at the market reaction to Google’s recent quarterly report.

Chart courtesy of StockCharts.com

Facebook, Inc. (NASDAQ:FB), by comparison, got pummeled when it revealed a slowdown in user growth. I’m not sure that would have happened if Facebook had diversified away from advertising.

In any case, Google stock is looking very attractive at the moment. It is a 16% move from becoming the first-ever $1.0-trillion stock.

However, we need to ascertain whether Google’s new golden geese—cloud computing and driverless cars—can keep the share price moving up and to the right.

Pentagon Offers Winner-Take-All Contract

While Amazon.com, Inc. (NASDAQ:AMZN) dominates cloud computing, Google has been pretty open about its ambitions in that field. The company wants to carve out a huge slice of market share in the hopes that this high-margin business can propel GOOG stock higher.

Now it has an incredible opportunity to make up lost ground.

The Pentagon is looking to upgrade its IT software and, in order to do that, the Department of Defense has to spend $10.0 billion on cloud computing. Here’s the kicker: it wants to award the entire contract to only one company for a 10-year period. (Source: “JEDI Cloud RFP,” Federal Business Opportunities, July 26, 2018.)

Amazon is widely considered the front-runner, but I’m not quite sure that’s right. There are two reasons I think this contract could go to Google instead.

1. The Trump-Bezos Feud

For those of you not keeping track of billionaire-on-billionaire feuds, President Donald Trump has an ongoing vendetta against Amazon CEO Jeff Bezos. They don’t like each other much.

Bezos is, among other things, the sole owner of The Washington Post, a newspaper responsible for critical reports about the present administration.

And if you think there’s no way President Trump’s personal feuds can impact a private company, you should check the President’s twitter feed more often. Here are some of his complaints:

Shares of Amazon fell after the president made these remarks, meaning the market is taking these concerns seriously. So, it’s quite possible that Amazon could fail to secure the contract.

If Amazon drops out of the running, we could see the contract go to an underdog like Microsoft Corporation (NASDAQ:MSFT) or, you guessed it, Google.

2. Eggs in Multiple Baskets

Amazon currently provides cloud computing for the CIA. While some analysts believe this improves the company’s chances of getting the DoD contract, Congress might not feel the same way.

Congress withheld funding until the contract was rewritten. Under the new terms, the Pentagon could void the deal after two, three, or five years—making it a far less risky proposal for the government than anything that came before.

With that in mind, does it seem likely that Amazon will win another contract? It would make much more sense to hedge against Amazon’s influence with the government by giving the contract to Google or Microsoft.

So, to sum up, the market is undervaluing Google’s odds of receiving a $10.0-billion contract for cloud computing. And that business segment, cloud computing, is precisely what insulated GOOG stock from the recent disaster that befell Facebook.

Analyst Take

Overall, the lesson is to keep innovating. Google has done that, and it has prospered. Amazon has done that too, and its share price has been soaring. Facebook, meanwhile, has relied on bleeding users of their privacy to stay in business. The result was $120.0 billion in lost market value.

I view this divergence as a permanent trend. Facebook stock might bounce back, of course, seeing as expectations are hideously low, but that doesn’t mean it will keep pace with the Googles and Amazons of the world.