Microsoft Corp. (NASDAQ: MSFT) has had a tough run for 2015 so far. The stock is down 13% year to date and barely even with its position from a year ago. The software giant disappointed on earnings and was sold off pretty hard in the middle of January, and since that time the company has struggled to reclaim its former price level. Luckily, Wells Fargo saw upside in this company when it decided to upgrade Microsoft, although this call comes with a serious caveat.

Wells Fargo upgraded its rating on Microsoft to Outperform from Market Perform but at the same time it maintained the valuation range of $46 to $50. The firm thinks the stock adequately reflects the XP hangover and negative foreign exchange headwinds.

The fiscal third-quarter total revenue and earnings per share (EPS) estimates were cut to $20.7 billion and $0.52 from $21.0 billion and $0.53, respectively. The fourth-quarter (June) estimates were reduced to $22.0 billion in revenue and $0.60 in EPS from $22.7 billion and $0.61, respectively.

According to Wells Fargo:

The risk with our upgrade is that we are assuming investors have baked the cuts into expectations even though it is not yet reflected in consensus estimates. Even with that issue we don’t see much more than 5% downside risk. With over 15% upside potential to the middle of our valuation range we think the risk/reward is compelling. We are lowering FY15 EPS to $2.50 from $2.52 and FY16 goes to $2.70 from $2.73 previously. For FY16, we are significantly below the consensus estimates of $99.2B in revenue and EPS of $2.95. We are less concerned about picking an absolute bottom as we think the 3% dividend yield provides a cushion at the $40 level. Our valuation range remains unchanged at $46-50.

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Wells Fargo expects the estimates to find a bottom in the 2016 fiscal year, and that strategic moves can help the company return to a revenue growth position in the next fiscal year.

The firm also said in its report:

In our opinion, Microsoft is making sound strategic moves that have repositioned the business for sustained growth. We like the company’s strategy of mobile first and cloud first as it moves forward into the post PC era. We believe that there is one more round of estimate cuts needed to reflect market conditions and a tougher FX environment. That said, we think that lower estimates are largely priced into the stock already (given the nearly 10% drop in share price in the last month, compared to a 2% drop for the S&P 500.)

However, the firm also saw that there were several data points over the past month that led it to believe the consensus estimates for Microsoft are still too high.

Shares of Microsoft were up 1% at $40.68 on Monday morning. The stock has a consensus analyst price target of $46.97 and a 52-week trading range of $38.51 to $50.05.

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