Citigroup says Microsoft remains committed to its bid to purchase Yahoo and has upgraded Yahoo shares to from 'hold' to 'buy', while raising its price target on Yahoo's stock from $31 (£15.50) to $34 (£17).
Last month, Microsoft made an unsolicited offer to purchase Yahoo. The bid was initially rejected, but according to the Wall Street Journal, executives from the two companies have since met to discuss the deal. No official announcements have been made by either company, however.
According to Reuters, Citigroup analyst Mark Mahaney told clients in an advisory that he believed Microsoft "is capable of and willing to" increase that bid to conclude the deal.
Mahaney also believes Yahoo is looking for alternative bidders.
"While we continue to see no other competing bidders, we believe Yahoo is aggressively pursuing strategic alternatives," he said.
"One possibility is a tie-up with Time Warner, whereby Time would contribute its online content assets to Yahoo in exchange for a stake in the company. We believe this could serve as a forcing function to a higher Microsoft bid," added Mahaney.
However, Citigroup still views a Microsoft-Yahoo deal as the most likely outcome.