Analysts at Morgan Stanley (NYSE:MS) upgraded their rating for the shares of Microsoft Corporation (NASDAQ:MSFT), despite the fact that the expectations for the company is very low because of the disappointing performance of the Windows 8 launch.

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Morgan Stanley (NYSE:MS) analysts, Keith Weiss and Melissa Gorham, recommended an overweight rating with $36 price target for the stock of Microsoft Corporation (NASDAQ:MSFT) saying that several catalysts could improve investors’ confidence for the software giant.

Weiss and Gorham emphasized that Microsoft Corporation (NASDAQ:MSFT) is miss priced versus its core earnings power. According to them, the worsening sentiment for the company trumped the valuation disparity.  The analysts said the disparity between sentiment and fundamentals widened because of the lackluster performance of Windows 8. They think the situation presents a risk/reward set up for the company if it can post some positive results.

The analysts believe that the software giant’s performance will improve in the second half of 2013. Weiss and Gorham identified three catalysts such as 1) the improving PC unit growth, 2) out performance of Microsoft’s S&T and EDD divisions, and the 3) increasing exposure of its cloud businesses. According to them, the faster release of Windows Blue and a better release of Windows 8-touch enabled devices in the FY14, could improve consensus demand.

Weiss and Gorman emphasized, “Execution against any of these opportunities (but particularly 1 and 3), should help close the >20 percent multiple discount between MSFT and its large cap peers- sending shares towards our one-year $36 price target.”

Based on their analysis, the analysts believe that Microsoft Corporation (NASDAQ:MSFT)’s revenue can still grow over the next five years even if PC’s decline by 5 percent every year. They noted that the shares of the company traded poorly during the times when it launched its Windows software whether it was successful or not. In addition, Weiss and Gorman said that Original Design Manufacturers (ODM’s) see improvements on orders from PC makers as Taiwan notebooks ODM’s Compal, Winstron, and Asustek posted better-than-expected sales last month.

The analysts also noted that Microsoft’s Xbox 360 franchise is a hit after emerging as the top selling game console for 26 consecutive months. The company already sold 76 million units. They expect the company to release the refresh Xbox 720 this summer.

Furthermore, Weiss and Gorman believe that Microsoft Corporation (NASDAQ:MSFT)’s Server & Tool (S&T) division remains an under-appreciated asset. They also noted that the feedback on market momentum for its Server 2012 remain positive along with ~20 percent Server SQL 2012 price increase. Moreover, they said that based on their April 2013 CIO survey, the company’s exposure in cloud businesses is growing as 20 percent of respondents said they are using Microsoft’s azure platform for Platform as a service (PaaS) functionality.

The analysts emphasized that the stock of Microsoft Corporation (NASDAQ:MSFT) will remain attractive on a P/E basis. According to them, “Microsoft currently trades at a through forward multiple ex the ’09 recession (or only 13 percent above the low of the ’09 recession), which is >35 percent discount to the S&P vs. five year average of a ~15 percent discount to the S&P. MSFT trades at >20 percent discount to mega cap peers on a CY14 EPS basis and >50 percent discount on CY14 FCF.”