Amazon and Microsoft are fighting for a $10 billion Pentagon contract - and HQ2 in Virginia could be Amazon's boss move

Chip Somodevilla/Getty Images

• Crystal City, Virginia, is a likely contender for Amazon to build its second headquarters HQ2, and the fact that it's near Washington, D.C. is "well timed" as Amazon competes for a massive $10 billion cloud contract with the Pentagon, analysts say.
• Still, both Amazon and Microsoft investors should be paying attention, as Microsoft also has a strong chance in winning the contract.
• There's an estimated $20 billion in cloud spending up for grabs from the government, and whoever wins the contract will also likely become the biggest player in the cloud business.
• "I don't think the timing of Amazon moving its headquarters near D.C. is coincidental," an analyst told Business Insider.

Crystal City, Virginia has emerged as one of the top contenders for the site of Amazon's so-called HQ2 headquarters- and now that Amazon is competing for a $10 billion cloud contract with the Department of Defense, it's a "well timed move," analysts say.

The DoD contract, called the Joint Enterprise Defense Infrastructure, is a 10-year deal that will be awarded to a single company to move the Pentagon's data onto a cloud. Bids for this massive contract closed in October, but now that bids are being reviewed, investors in Microsoft and Amazon should pay attention, say analysts at financial firm Wedbush Securities.

"Let's just put it this way. I don't think the timing of Amazon moving its headquarters near D.C. is coincidental," Daniel Ives, Managing Director of Equity Research at Wedbush Securities, told Business Insider.

It's really a two-horse race for the contract, and while Amazon has been seen as the frontrunner, Microsoft has put in significant effort in the past year to narrow the race. And the implications go beyond the deal itself - it could completely transform the cloud industry, especially if Microsoft wins. An award is expected in April 2019.

This is the biggest government cloud deal ever, but winning JEDI has a domino effect. Whoever wins this contract will be well-positioned to win future government contracts - analysts reckon that there's $20 billion in cloud spending up for grabs from the government.

Plus, there's a stamp of credibility - it would be hard for enterprise customers to turn down a cloud company that was selected by the federal government itself.

"Many investors have underappreciated the ripple effect of whoever gets JEDI," Ives said. "Whoever gets JEDI, it's not just about the $10 billion over the last decade. There would not be a better mark of credibility than to get this deal. Investors are trying to understand, is it just an Amazon, or does Microsoft have a shot to win JEDI from the grips of [Amazon CEO Jeff] Bezos?"

Don't expect Jeff Bezos and Donald Trump to go on vacation together

That could be why Amazon is considering moving its headquarters to Virginia, analysts say. With a base of operations near Washington, D.C., Amazon could boost its presence in federal circles.

Microsoft has an office in Washington, D.C. as well, but if Amazon builds HQ2 in Crystal City, its massive campus with 25,000 employees would easily dwarf Microsoft.

"As Amazon looks to have their employees in the shadow of the Pentagon, JEDI is a big component of how they will build out their presence within the beltway," Ives said. "To have a headquarters in and around the beltway shows that Amazon is significantly focused on their federal presence."

Read more: As bidding closes, Amazon's cloud is the favorite to win a $10 billion defense deal. Here's why everybody else is so mad about it

Still, Microsoft has invested significant amounts of money, time and effort into its government cloud, certifications, and security for classified documents. If Microsoft wins, it would be a "crowning achievement" for Microsoft CEO Satya Nadella.

"It would have a significant ripple effect for cloud," Ives said. "With DOD going to cloud with Microsoft, it's hard to argue with that sales pitch."

AP

Jeff Bezos

And politics could be a small factor, too. It's no secret that President Donald Trump and Amazon CEO Jeff Bezos aren't on the best terms, so in addition to investment in its Azure government cloud, this is where Microsoft could swoop in.

And unlike the hesitation from Google to work with the military, Microsoft is all in, saying it will sell artificial intelligence technologies to the Pentagon.

"It's no secret about Trump and Bezos. I don't expect them to be going on vacation together," Ives said. "For Bezos and Amazon to own the cloud at DOD as the sole victor, within the beltway, there's a lot of views that would not like to see Amazon as the sole winner. There's definitely a complex political environment."

Either way, cloud investors should keep an eye on the JEDI deal.

"For any investor in the cloud space, it should be on their radar," Ives said. "It's the ripple effect it could have on the cloud landscape."

Get the latest Microsoft stock price here.