Since influential

Goldman Sachs

analyst Rick Sherlund issued a negative report last Thursday on


(MSFT) - Get Report

, reducing his revenue and earnings projections for the company's March quarter, the stock has been rising like a helium balloon.

It's enough to make even the most optimistic investor wonder whether Sherlund, regarded by the Street as the ax on Microsoft, was losing his edge. He has enjoyed a close relationship with the company since Goldman underwrote its IPO in 1986, and his reports have carried enough punch to move even a heavyweight such as Microsoft.

But rather than a loss of pull, the issues raised in Sherlund's report and the way investors reacted to them may suggest a fundamental shift in investors' attitudes about Microsoft.

At least, that was Sherlund's take on what happened. In addition to short-sellers covering their positions (by buying the stock), Sherlund says he thinks that Microsoft shares may have gone about as low as they are going to go.

"Software is not quite at the point of capitulation (when investors have essentially give up on a stock and begin panic selling that causes a dramatic decline in its share price), but a few stocks within the sector are. It looks like Microsoft may be one of them," Sherlund says.

Microsoft has been steeped in bad news coming from the shrinking PC market since last fall. Last quarter, Microsoft warned that it wouldn't meet projections for the first time in more than a decade. Investors were waiting for another negative report after Intel's early March preannouncement because the chipmaker, too, is sensitive to sluggish PC demand.

Then came the ax's report. Sherlund wrote that sequential revenue growth for the March quarter would decline 10%, instead of the 5% drop previously estimated, based primarily on other preannouncements in the tech sector. He also cut earnings estimates for the quarter and predicted flat earnings growth through 2002.

More bad news? Not at all, says Sherlund.

"This report was actually good news. It said things aren't bad enough that Microsoft has to warn," he said. (Sherlund rates the stock an outperform.)

Howard Love, general partner of

Love Capital Partners

, agrees that Microsoft investors have been so overloaded with bad news that "any whiff of good news sends the stock up," said Love. "An 8% increase Thursday was a monster move for 'Softee, but Sherlund said that the problems are already baked into the stock," he added. (Love is long Microsoft.)

And in these perilous times, many buyers are looking to put their money into established, cash-rich companies like Microsoft. Even legally challenged, PC-dependent Microsoft looks safer than most, especially with some buzz coming from its ambitious


software-as-a-service strategy.

Jeff Matthews, president of Connecticut-based hedge fund

Ram Partners

, says Sherlund himself may have had a hand in boosting the stock. Matthews said he had heard the analyst was in Boston proclaiming his renewed confidence in the company to a group of institutional investors. "Sherlund apparently was warming to Microsoft again because Gates is really getting back in control of the company and will make its .Net a success," says Matthews.

As high-profile analysts such as Henry Blodget get mostly grief as their darlings fall by the wayside, Microsoft's swing since Sherlund's report may confirm Howard Love's take on the situation. "Rick hasn't lost his edge."

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Corrections and Clarifications.