What Microsoft's New $22 Billion Government Contract Means for Its Stock

By newsfeedback@fool.com (Brett Schafer)8 days ago

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Last week, the U.S. Army announced that it had finalized a $21.9 billion deal to have Microsoft (NASDAQ:MSFT) provide 120,000 augmented-reality (AR) headsets for its troops over the next 10 years. Investors have responded enthusiastically, bidding Microsoft stock up by more than 7% since the announcement.

But what will this deal really mean for Microsoft?

Image source: Getty Images.

The deal

The contract is worth upwards of $21.9 billion and could see Microsoft sell the government more than 120,000 headsets based on its HoloLens 2 hardware. The deal is good for an initial period of five years with the option for the Army to renew it for another five years. This means that some portion of that $21.9 billion in revenue may not be guaranteed, but as long as Microsoft holds up its end of the deal, it's unlikely the government will back out five years in and go through another arduous implementation process with a different vendor.

So what is the HoloLens 2? It is Microsoft's AR headset built for enterprise customers. The standard headset goes for a whopping $3,500 with premium versions costing upwards of $5,000. Assuming the deal is for 120,000 devices as the rumors say, that would mean the government is paying $182,500 for each unit. That's a huge price bump, but the HoloLens 2 will only be the core of what the military is asking for -- an Integrated Visual Augmentation System (IVAS). The company will be making the systems more rugged and adding a lot of custom hardware and software features on top of the standard model, such as thermal and night-vision sensors.

Government contracts can carry complications

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