Jefferies & Co raised its price target on Microsoft Corp's stock to $26 from $22 and recommended buying shares of the world's largest software company ahead of a possibly large, rapid corporate PC upgrade cycle starting in late 2010.

Jefferies said it expects customers to upgrade directly from the Windows XP operating system to Windows 7 starting in 2010 as Microsoft ended support for Windows XP in April.

Jefferies also expects the company to lower its operating expenses estimate for fiscal 2010 as it cuts costs by eliminating reimbursement for discretionary items.

In April, the company reported a 32 percent drop in quarterly profit, yet was cheered on by investors who welcomed continuing efforts to cut costs and the news that the release of Windows 7 was on track. [ID:nN23368207]

The brokerage said it expected Microsoft's stock to significantly outperform its peers and the S&P 500 index .SPX over the next 12 to 18 months.

Shares of the Redmond, Washington-based company, which have fallen about 19 percent over the last year, were up marginally at $23.51 in pre-market trade Tuesday. They closed at $23.42 Monday on Nasdaq. (Reporting by Sayantani Ghosh in Bangalore; Editing by Anne Pallivathuckal)

Software Microsoft Price Target