Benchmark initiates coverage on Pagaya Technologies with a Buy rating: Should you invest?

On August 26, 2024, benchmark analyst Mark Palmer initiated coverage on Pagaya Technologies (NASDAQ: PGY) with a Buy rating and a price target of $21. This target suggests a significant upside potential of 56% from the current trading price.

Palmer’s optimistic outlook was driven by Pagaya’s strategic advancements, particularly in the AI-powered credit decisioning space, despite the company’s recent stock pullback.

The analyst pointed out that while some investors may have focused on a negative data point—such as the $58 million in losses due to marking older loans to fair value—there were substantial positive developments that have positioned the company for future growth and profitability.

KBW’s coverage

In June, Keefe, Bruyette & Woods (KBW) initiated coverage on Pagaya with an Outperform rating, highlighting the value the company brings to large lenders.

KBW’s analyst Sanjay Sakhrani emphasized the unique benefits that Pagaya’s platform offers, particularly in enabling lenders to maintain customer relationships even when they do not directly provide the loans.

This strategic advantage, coupled with the company’s path towards cash flow positivity by 2025, contributed to the favourable outlook.

Strategic partnerships and funding agreements

Pagaya’s recent strategic moves have significantly bolstered its operational and financial positioning.

In early August 2024, Pagaya entered into a forward flow agreement with Castlelake LP, allowing the latter to purchase up to $1 billion in consumer loans originated on Pagaya’s platform.

This agreement is expected to diversify Pagaya’s funding sources while reducing its reliance on its capital for loan origination.

Additionally, the company formed a new partnership with OneMain Financial, which will leverage Pagaya’s technology to broaden its customer base.

These developments not only expand Pagaya’s reach but also enhance its ability to scale efficiently, which is crucial as the company continues to grow its network of over 120 institutional investors.

Q2 earnings and financial performance

In its second-quarter 2024 earnings report, Pagaya posted mixed results, with revenue exceeding expectations but non-GAAP EPS falling short.

The company reported revenue of $250.34 million, a 28% year-over-year increase, driven by a 31% rise in fee revenue.

However, Pagaya also recorded a net loss of $75 million, primarily due to non-cash adjustments related to older loans.

Despite this, the company achieved a record adjusted EBITDA of $50 million, surpassing its outlook and reflecting improved operational efficiency.

Pagaya’s management remains confident, having raised its full-year 2024 guidance for both revenue and adjusted EBITDA, underscoring the company’s strong growth trajectory.

Fundamental strengths and headwinds

The company’s AI-powered credit decisioning platform continues to gain traction, evidenced by the onboarding of a new top 5 bank in its POS vertical and the expansion of its partnership with LendingClub.

Additionally, Pagaya’s ability to secure its first AAA rating for its personal loan ABS program highlights the improving quality of the loans facilitated through its platform.

Despite these positive developments, Pagaya faces several challenges. The company’s net losses, largely driven by adjustments to the value of retained loans, remain a concern for investors.

These losses are partly attributable to older loans with higher default rates, though the company has made strides in reducing these risks by tightening its AI algorithms and focusing on more creditworthy applicants.

Furthermore, Pagaya’s capital-intensive business model, which requires substantial upfront costs for onboarding new partners and maintaining compliance, presents ongoing challenges.

The company’s ability to manage these costs while continuing to grow will be critical to its long-term success.

Pagaya’s stock currently undervalued

Pagaya’s valuation metrics suggest that the stock is currently undervalued.

With an adjusted EBITDA guidance of $200 million for 2024, the company is trading at just over 4.5 times its expected EBITDA, which is considered a bargain in the fintech space.

This low valuation, combined with Pagaya’s robust growth prospects, suggests substantial upside potential.

In comparison to peers like Upstart, Affirm, and LendingClub, Pagaya’s valuation appears particularly compelling, especially considering the recent enhancements to its business model and operational efficiency.

Profitability outlook

Looking ahead, Pagaya’s strategic focus is on achieving profitability and positive net cash flow by 2025.

The company plans to reduce the percentage of assets retained on its balance sheet to 2%-3%, down from the current 5%, through various financing instruments like the forward flow agreement with Castlelake.

Additionally, Pagaya aims to continue improving its margins by leveraging economies of scale and enhancing operational efficiency.

With strategic partnerships in place, a path toward profitability in sight, and strong revenue growth, Pagaya is poised to capitalize on its technological strengths.

However, the market will be closely watching how effectively the company manages its risks and delivers on its ambitious goals.

With these fundamental factors in mind, the next logical step is to examine how these dynamics are reflected in the stock’s price movements and what the technical indicators reveal about its potential future trajectory.

Rangebound between $9 and $15

Pagaya’s stock saw a rapid rise from $13 to above $30 in Q3 last year and in the next quarter fell back to $13 levels.

Since March this year, the stock has been trading in a $9-$15 range.

Source: TradingView

As long as the stock remains in this trading range, neither bulls nor bears should expect bigger moves.

However, in recent weeks the stock has taken support near $11 level multiple times which is a good sign for bulls.

Hence, investors bullish on the stock can initiate long positions at current levels with a stop loss at $10.72.

Traders who continue to be bearish on the stock must wait for it to reach near $15 before initiating short positions.

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