While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Microsoft (NASDAQ:MSFT) gained slightly this morning after FBR Capital upgraded the software behemoth from market perform to outperform.
So what: Along with the upgrade, analyst Daniel Ives raised his price target to $49 (from $43), representing about 22% worth of upside to yesterday's close. So while contrarian traders might be turned off by Microsoft's year-to-date price strength, Ives' call could reflect a sense on Wall Street that its cloud-related growth prospects give the stock more room to run.
Now what: According to FBR, Microsoft's risk/reward trade-off is rather attractive at this point. "While the company has clearly missed opportunities to become a major player in the tablet, mobile, and search markets over the years, we believe now with Nadella at the helm, Microsoft is off to a golden start with his improved transparency and strategic focus on the mobile/cloud space," said Ives. "Coupled with a number of key strategic announcements Nadella has made as new CEO (Office on iPad, free Windows on certain mobile devices, Surface Pro 3, partnership with salesforce.com), we also believe Microsoft's disciplined spending leaves it poised for long-awaited growth in free cash flow (we estimate 5% year-over-year growth for FY15), representing a breath of fresh air for investors, in our view." When you couple that upbeat outlook with Microsoft's rock-solid balance sheet and still-reasonable P/E in the mid-teens, it's tough to disagree with FBR's upgrade.