Salesforce.com (NYSE:CRM) stock surged to all time highs in late August after the cloud giant delivered a monster double-beat-and-raise second-quarter-earnings report which impressed investors and analysts alike.

Analysts hiked their price targets and lauded the strength of the company’s cloud business in the quarter. Investors gobbled up the stock.

In the big picture, both of these groups are right. Salesforce’s strong earnings report confirmed that the cloud-powered enterprise digital transformation is indeed accelerating thanks to the Covid-19 pandemic. The results also showed that Salesforce is at the epicenter of this dramatic transformation, helping businesses of all shapes and sizes migrate their workflows and processes to the cloud.

Consequently, the earnings report confirmed that CRM stock will be a long-term winner.

And while bears may be screaming that the stock’s valuation is too rich, it’s not. Relative to the company’s long-term growth potential, CRM stock is fairly valued today.

So stick with Salesforce stock.

Here’s a deeper look.

Salesforce’s Strong Earnings

Salesforce’s second-quarter earnings report was very strong.

Its revenue rose 29% year-over-year, while its gross margins expanded 0.5 percentage points. Its operating-spending rate fell 5.4 percentage points. Salesforce’s operating margins roared 5.90 percentage points higher to their highest level ever, and its operating profits soared 82% YOY. Its Q3 and full-year revenue and profit guidance also came in much better than expected.

Amid those headline numbers, two really stick out: 29% revenue growth and operating margin expansion of 5.90 percentage points.

The nearly 30% increase of Salesforce’s revenues was very impressive, given the declines of companies’  spending amid the pandemic and expectations for a drop of more than 7% in IT spending.

This sustained revenue growth speaks to the robust underlying demand for Salesforce’s suite of services . It also shows that the company’s products are vital to customer-facing business as they adopt more digital tools.

Meanwhile, the 5.9 percentage  point increase in its operating margin stands out because, for several quarters, Salesforce has been spending a large amount in order to grow a large amount, resulting in negative operating leverage. That’s no longer the case, though, because Salesforce is relying on macro demand tailwinds, instead of marketing, to increase its sales.

Salesforce’s revenues rose 29% in Q2, but its operating expenses rose just 18%, resulting in positive operating leverage.

Importantly, this trend is expected to continue. Operating margins are expected to expand 0.75 percentage points for the full year, implying more positive operating leverage in the back half of 2020.

Powerful Long-Term Trends

Salesforce’s Q2 earnings report was not just a flash in the pan.

They are a sign of the times.

Everywhere across the globe, every business is pivoting to the cloud. This pivot was sparked by the Covid-19 pandemic shutting the physical world down in the first half of 2020, but it has  continued into the second half of the year and will sustain over the next few years. That’s because cloud services offer significant convenience and cost advantages.

As a result, the adoption of cloud-based enterprise services will inevitably transform into a defining megatrend of the 2020s.

Salesforce is at the epicenter of this megatrend, offering a suite of many best-in-breed cloud-based enterprise services, including commerce, analytics, sales, and marketing.

Competition in the sector is intense and only getting steeper. But Salesforce has consistently thwarted that competition with innovation, new products, expansion into new geographic markets and favorable pricing. That’s why Salesforce’s share of the global customer-relationship-management market has consistently climbed over the past several years to almost 20%.

As companies increasingly adopt cloud-based services over the next decade and Salesforce continues to have  leading market share in the cloud CRM market, its revenue and profits will  continue to climb. As a result, CRM stock will continue to rise.

Salesforce Stock Is Fairly Valued

It’s easy to look at CRM stock’s  forward earnings multiple of 78 and say that the stock is expensive.

But investors should take a multi-year perspective, since Salesforce’s long-term growth outlook is very strong.

From a multi-year perspective, CRM stock is fairly valued.

Here’s the math.

IT spending has consistently grown at a 3% compounded annual growth rate over the past several years. That trend will persist for the next decade. Cloud spending as a percent of total IT spending has consistently grown by about one to two percentage points per year. That trend will persist for the next decade, powering roughly 10%-plus growth in public cloud spending into 2030.

Salesforce will continue to be the market-share leader of the public cloud market, enabling its sales to increase at a 10%-plus rate into 2030. Its gross margins will improve slightly as it grows. Positive operating leverage will also boost its profits as Salesforce relies less and less on marketing to drive growth and more and more on brand equity and positive macro-demand catalysts. Operating margins of about 30% seem doable by 2030.

Under those very basic assumptions, my modeling suggests Salesforce is on track to generate earnings per share of about $15 by 2030. Based on a forward earnings multiple of 35 and an 8.5% annual discount rate, that results in a fiscal 2021 price target for CRM stock of about $275.

So the stock is fairly valued today.

The Bottom Line on CRM Stock

Salesforce is a long-term winner that’s trading at a fair valuation and has significant demand drivers on the horizon.

That’s a winning recipe.

So stick with CRM stock.