SUNNYVALE, Calif. (

TheStreet

) -- Shares of Internet giant

Yahoo!

(YHOO)

will bask in the warm afterglow of the company's recent

search partnership

with

Microsoft

(MSFT) - Get Report

, offering plenty of upside to investors. This is the message from analyst firm Jefferies & Company, which raised its Yahoo! price target Tuesday, citing the benefits of the

Microsoft deal

.

"Despite the recent run-up in Yahoo! shares, we find the valuation still attractive as it fails to fully reflect accretion from the Microsoft deal, potential upside from Asian assets and rebound in display

ads," wrote Jefferies analyst Youssef Squali, in a note released Tuesday. "Shorter-term, management's focus on core priorities and cost should bode well for stock."

Jefferies raised its Yahoo! price target from $20 to $23, assuming the deal closes by the end of 2010. Yahoo!'s shares have risen more than 35% in the last six months, although Squali feels that the company's stock is still undervalued.

Under the terms of the 10-year pact, Yahoo! will use Microsoft's

Bing

search engine and collect 88% of the advertising revenue for the first five years of the deal.

Seen as something of a

masterstroke

by Microsoft in its attempts to challenge

Google

(GOOG) - Get Report

, Squali predicts that the agreement will also help Yahoo! expand its margins.

Yahoo! also launched a $100 million

branding

campaign recently, a key part of CEO Carol Bartz's efforts to reposition the company. This, however, was not factored into Jefferies' estimates, although Squali sees the move as a positive.

"We believe the $100 million branding campaign should further strengthen Yahoo!'s defensible position in display at an opportune time as our channel checks suggest that display demand seems to be coming back," he wrote.

Despite its recent efforts, the company remains a

distant second

to Google in Internet search. Recent figures from research firm ComScore reveal that Google has almost 65% of the search market, with Yahoo! trialing well behind with 19.3%. Microsoft's Bing is in third place, with 8.9% of the U.S. market.

Yahoo! shares closed at $17.47 Monday, and are currently the cheapest of large-cap Internet stocks.

-- Reported by James Rogers in New York