UBS US research analysts Brent Thill, Amitabh Passi, Steven Milunovich and Stephen Chin maintain buy ratings for Microsoft Corporation (NASDAQ:MSFT), details from the report below.

Also see Rare Interview with Jeff Ubben on Microsoft

Microsoft

Our Buy rating is predicated on six unique characteristics: 1) Potential for greater earnings visibility with a new CFO onboard. 2) Increased investor appreciation for its cloud momentum. 3) Potential for a margin-friendly re-organization. 4) The worst for PCs is likely behind us, with multiple catalysts for improvement, from XP expiration in April 2014 to Windows 8.1 + Haswell PCs. 5) Potential for shareholder activism. 6) We see continued 10%+ dividend growth over the next few years. Our $40 price target is based on 14x forward NTM EPS of $2.93.

Upside scenario for Microsoft

Our upside valuation is $48 per share, based on the market paying its five-year peak multiple of 15x EPS on forward NTM EPS of $3.22, 10% higher than our base case. Our upside scenario involves stronger than expected IT demand and/or an improving PC demand environment generating faster than expected growth and higher operating leverage.

Downside scenario for Microsoft

Our downside valuation is $21 per share, based on the market paying its five-year trough multiple of 8.0x EPS on forward NTM EPS of $2.64, 10% lower than our base case. Our downside scenario involves slower than expected IT demand and/or a deteriorating PC environment generating slower than expected growth and lower operating leverage.

Microsoft’s business improving

Microsoft Corporation (NASDAQ:MSFT) is the world’s largest software company. Its software runs on a variety of hardware, from computers to servers and cell phones. Microsoft has built a solid position in various hardware markets from computer peripherals to video game consoles. In recent years, it has built out a robust internet and cloud-based computing strategy to complement its core software business. Despite the diversification, over 80% of its revenue and nearly all of its profits continue to be derived by its ubiquitous Windows OS, its server business (Windows Server), and the business division (Office).

Outlook for Microsoft stock

Microsoft Corporation (NASDAQ:MSFT) competes in nearly every subsector of software, but it is most exposed to the secularly slow-growing operating system market. As such, Microsoft’s stock has been trading at a discount to the S&P 500 (INDEXSP:.INX) on an earnings basis for years on the thesis that Microsoft’s best days are in the rear-view mirror and it is not well positioned as computing enters the cloud era. We disagree, as Microsoft has been among the most aggressive vendors, building out a massive global data-center footprint to offer cloud services to customers, and is perhaps best positioned of all the IT vendors, with the capital and technology to offer its customers a hybrid cloud model.