It's worth stating up front that just before COVID-19 took control of the world and sent global stock markets crashing, I thought shares of (CRM -1.62%) were a great long-term buy even north of $170 per share. Hindsight is 20/20, and of course reiterating the call now (the stock trades for $140 per share as of this writing, down about 30% from all-time highs) would have been far better. I take solace in the fact that the software outfit's 2020 year-to-date return of negative 14% is at least beating the overall market's return -- as measured by the S&P 500 -- of negative 24%. 

However, not much has changed for Salesforce's long-term prospects since my last write-up, which came right after the company's year-end report for fiscal 2020. While coronavirus is sure to have an adverse effect on business in the next year or so, the pandemic is likely to further accelerate digital transformation rather than slow it down. As one of two companies at the heart of the movement (the other being Adobe, which I am also going to add to my portfolio soon), I am reiterating my long-term buy thesis for Salesforce.

A reminder as to what Salesforce does

Salesforce started out as a maker of customer relationship management (CRM) software. It quickly gained notoriety because of co-founder and current CEO Marc Benioff's ardent championing of cloud computing -- services delivered remotely via an internet connection. 

These days, there's a lot more going on under the hood than just CRM. Salesforce now runs an entire ecosystem of cloud-based services, all with the aim of helping organizations strengthen their relationship with customers. These services can be broken down into four segment "clouds": sales, service, platform, and marketing and commerce. On track to do $20 billion in business this year, the software giant is still growing well over 20% annually -- with the newer platform cloud (created primarily through the MuleSoft and Tableau acquisitions in 2018 and 2019) and marketing and commerce cloud (created with the Demandware acquisition in 2016) leading the way with 57% and 32% growth last year, respectively.  

Thus, Salesforce has a solution for every business-customer interaction, and the massive move to digital has been rocket fuel for this cloud-computing advocate. Often referred to as "digital transformation," worldwide spending on tools to adapt to new consumer preferences and business operations in the cloud is loosely pegged at a few hundred billion dollars a year. As if that weren't enough money to go around, economic research suggests that spending will continue to increase by a double-digit percentage each year for the foreseeable future and approach $1 trillion a year around 2025.

Of course, estimates on digital transformation pre-dated coronavirus, but with the world in shock and looking increasingly unprepared for the spread of the disease, organizations (especially those that have been dragging their feet) are likely to take a more serious look at said digital tools to build more resilient operating structures once the dust settles.

Someone in a business suit pictured offscreen holding a tablet. A brain made of electrical connections hovers above the screen, illustrating AI.

Image source: Getty Images.

Buying for growth but at a reasonable price?

Salesforce isn't without its flaws, though, and that's the likely reason this high-growth stock has been punished in recent weeks. While it's far from uncommon for tech companies to reinvest any profits to maximize expansion, Salesforce is especially well-known for being an aggressive growth-now, profit-later operation. Besides organically developed services, acquisition announcements are a commonplace occurrence at Benioff's company -- with the purchase of many of them requiring the issuance of new shares (which dilutes the ownership of existing shareholders). 

Nevertheless, as explained last autumn, it's not as if Salesforce hasn't been able to produce impressive results with its seemingly spend-happy ways. Far from it: Even with the issuance of plenty of new shares (including the absorption of the $15.8 billion Tableau purchase), free cash flow -- money left after basic operating and capital expenses are paid for -- has soared. Put simply, Salesforce owners are getting great returns on the company's myriad software firm takeovers.

CRM Free Cash Flow Per Share Chart

Data by YCharts.

Now with a hand in everything from basic productivity tools to advanced data analytics and AI, Salesforce has become a self-perpetuating technology machine, adding tens of thousands of software developers and related professions to its ecosystem of services every year. Trading for 31 times trailing 12-month free cash flow and forecasting north of 20% revenue growth for the foreseeable future, profitability is set to continue growing at a torrid pace in the next decade. Thus, Salesforce remains a top long-term stock in my book, especially after the big drop in its stock price.