Who has been buying? 

At the start of the May, it was announced that Daniel Ek was pouring $50m into Spotify shares. There are two reasons why this is a big deal. Firstly, investing $50m is a big sign of confidence into a company and cannot be considered merely tokenistic. Secondly, Daniel Ek is the co-founder of Spotify and the CEO. This means that he has significant amounts of inside knowledge around the company. In a period where growth stocks are getting considerably beaten down, this shows that he genuinely expects the Spotify share price to rise. It is also a fundamental reason why I am tempted to buy some shares in the company. 

Other factors 

Despite this insider buying, the Spotify share price has continued to slip. In fact, it is currently priced at $99. This is lower than when Ek recently bought shares and a 60% decline from last year. Such a fall has mainly been caused by the general sell-off of growth stocks, alongside worries about the firm’s profitability. 

For example, in Q1, despite revenues reaching €2.6bn, gross profit only totalled €671m. This means that gross margins only equal 25%. Other streaming services, such as Netflix, operate with gross margins of over 40%. This highlights that Spotify has extremely low margins for the streaming industry. As these large expenditures are not likely to decrease, this raises concerns about the ability for Spotify to ramp up its profitability. 

Why would I still buy this growth stock? 

Despite these concerns, I am still confident about the future of Spotify. In the recent investor day, Ek reiterated plans for the company to “get a billion users”, while also generating $100bn in annual revenue and 40% gross margins. These targets are very ambitious. Yet if they can be achieved, it is likely that the Spotify share price would soar in the long term. 

Further, the group currently trades at a price-to-sales ratio of under 2. Yet in Q1, revenues grew at a rate of 24% year-on-year. This indicates that the Spotify share price may have now dipped too low. Therefore, although I worry about the current poor gross margins, I still believe this growth stock has been overly beaten down. Daniel Ek’s recent purchase equally provides me with optimism. Therefore, I am tempted to add some Spotify shares to my portfolio.

Tech stock #1: Meta/Facebook

The first of my tech stocks to get wrecked is Meta (NASDAQ:FB), the parent company of social-media giant Facebook. Meta also owns popular services Instagram, WhatsApp and Messenger. After the US market closed Wednesday night with Meta stock at $323, the company released its latest quarterly results. Oh boy, did Mr Market not like Meta’s message. At Thursday’s low, the stock had plunged to $235.74. This fall of $87.26 a share wiped more than a quarter (-27%) from Meta’s stock price, reducing its market value from $900bn to $659bn. This $241bn collapse might well be the worst one-day loss of company value in US history. On Thursday, Meta stock closed at $237.76, down 26.4%. But what caused the collapse? First, a quarterly fall in daily active Facebook users. Second, warnings of increased competition from fast-growing rivals such as video-based social network TikTok. Ouch.

Tech flop #2: Spotify

On Wednesday, audio-streaming service Spotify (NYSE: SPOT) also released disappointing quarterly numbers. Launched in 2008, Spotify has 406m users — including 180m Spotify Premium paid subscribers — across 184 markets. The world’s most popular streaming subscription service offers access to over 82 million tracks, including more than 3.6 million podcast titles. Alas, like Meta, Spotify warned that its subscriber growth would slow in the first quarter of 2022. Despite total revenue growing 24% year on year to almost $2.7bn in Q4/21, this tech stock also got smashed. Spotify shares closed at $191.92 on Wednesday and hit a 52-week low of $155.57 on Thursday. That’s a fall of almost a fifth (-18.9%), losing over $8bn of market value. On Thursday, SPOT closed at $159.76, down 16.8%. Again, this is another example of highly rated, high-profile tech stocks getting beaten down when growth slows or fails to match future expectations.

Tech wreck #3: Paypal

The third of my trashed tech stocks is Paypal (NASDAQ: PYPL), which also missed financial expectations on Tuesday. Again, after warning of weaker growth, Paypal’s stock took a pummelling. Three months ago, PayPal forecast 18% revenue growth in the 2022 financial year. That forecast has since been reduced to 15% to 17%. It now expects earnings per share of $2.97 to $3.15 in 2022, versus $3.52 in 2021. With the payments service apparently going ex-growth, its shares plunged on Wednesday. After closing at $175.80 on Tuesday, Paypal stock hit a low of $129.01 on Wednesday, before recovering to close at $132.57. That’s a crash of almost a quarter (-24.6%), wiping over $50bn from the group’s value. On Thursday, the stock opened lower still, bottoming out at $123.85 before closing at $124.30, down another 6.2%. Paypal also closed 4.5m accounts for abusing opening incentive payments, reducing its customer base to 426m.

Of course, each of these price slides could well be a blip after heroic performances from tech stocks since 2019. And all three companies have outstanding global brands. Who can say? Personally, I have already reduced my family portfolio’s exposure to highly rated US tech stocks. Instead, we’re buying cheap UK stocks on lowly ratings that pay high cash dividends!