Spotify (NYSE:SPOT) shares have been on an epic run since bottoming in March amid the market panic over COVID-19. The shares closed at just $118.18 on March 23 but now change hands at a whopping $270 per share only about three months later. Here's why the stock is still a buy.

Superior streaming product 

Many potential investors have thought of music streaming as an undifferentiated commodity business, because the streaming services have access to essentially the same music catalog. If that were true, then the streaming services would all be doing equally well. But that's not true -- Spotify dominates the paid streaming music business with over 130 million premium subscribers globally as of the end of March. 

The No. 2 paid streaming music service, Apple Music, has been notoriously silent on its subscriber progress since mid-2019, when it said it had about 60 million subscribers. Up to that point, Apple had been disclosing the number of Apple Music subscribers every few months or so.

The lack of disclosure since then suggests that Apple is not proud of the recent Apple Music subscriber numbers. After all, if the subscriber numbers compared favorably to Spotify's, Apple would be shouting them from the rooftops for marketing purposes.

The front desk at Spotify's headquarters in Stockholm, Sweden.

Image source: Spotify Technology.

The key factor behind Spotify's widening lead seems to be its singular focus on streaming audio. It is critical to Spotify's future that it win this game. In contrast, streaming audio is only a tiny part of the overall pie at Apple, Amazon, Alphabet, and others. It's not critical for those companies to win at streaming audio; their core businesses are big and dominant enough to make streaming audio nothing more than a sideshow.  

Spotify spent 615 million euros on research and development (R&D) last year (equivalent to $690 million at current exchange rates), and just under half of its employees work in R&D. It uses its reams of user data to create popular custom playlists like Discover Weekly and New Release Radar that continuously delight its customers. So it shouldn't be too surprising that the company focused solely on streaming audio with that level of R&D commitment is putting forth the best and most popular streaming audio platform.

Huge global growth runway

Spotify now operates in 79 markets around the world, and is rumored to be launching its 80th market, South Korea, sometime this year. Last quarter, monthly active users (MAUs) grew 31% to 286 million, 130 million of which are premium subscribers.

The company could easily have 1 billion or more total users in 10 years. For one thing, there are 3 billion payment-enabled smartphones in markets where Spotify operates or will do so soon. And there is precedent for globally-dominant digital platforms to have billions of users. For example, Facebook has 2.6 billion MAUs. Alphabet's YouTube has over 2 billion users.

The global audio streaming winner could approach similar numbers over the long term. On the one hand, Facebook and YouTube's businesses lend themselves to winner-take-all dynamics. In contrast, Spotify has several competitors today. However, that may not be true forever. As the global leader with the scale and revenue to reinvest the most in audio streaming R&D, Spotify is likely to out-innovate its peers and continue widening its lead over the competition.

Over the long term, it may not make sense for sub-scale players to remain in the business. Even the tech giants give up on certain initiatives from time to time to reallocate their resources to more promising areas. If that happens, this could be more of a winner-take-all or winner-take-most market than investors currently expect. It's clear Spotify would be the huge beneficiary.

Underappreciated margin potential

Since Spotify's IPO, many investors have viewed the company negatively, primarily due to the high royalty rates it pays the major music labels and other music rights holders. The thinking went that Spotify would never be able to extract better terms with the music rights holders given that those rights are in the hands of only a few big entities.

What those investors are missing is Spotify's aggressive move into podcasting. The company acquired podcasting players Gimlet, Anchor, and Parcast last year for a total of 357 million euros (equivalent to about $401 million at current exchange rates).

More recently, it made a huge splash by signing Joe Rogan and his Joe Rogan Experience podcast, one of the most popular podcasts out there, to a multiyear exclusive deal. And it followed that up by signing Kim Kardashian and the DC Comics universe to exclusive podcasting deals.

The big idea is that the more users the company can attract, the more users will listen to Spotify-owned podcasts -- and their accompanying ads. Creating podcast content represents a fixed cost that does not increase regardless of whether there are 10,000 ad impressions, 10 million, or 100 million.

That means podcasts should become increasingly profitable as the company benefits from the fixed cost leverage that it hasn't had thus far in the music streaming business. Despite the stock's run, that is still underappreciated. That's why investors should consider Spotify a buy.