Pagaya Technologies (PGY 7.33%) has taken investors on a wild ride after it went public by merging with a special purpose acquisition company (SPAC) in late June. The Israeli fintech company's stock opened at $7 a share on the first day, tumbled below $3 in July, jumped as high as $34.50 earlier this week, but now trades at about $23.
Should investors chase that massive (if volatile) rally? Or is Pagaya merely another "meme stock" which isn't actually supported by a sustainable business?
What does Pagaya Technologies do?
To approve loans, financial institutions generally assess a customer's FICO score, credit report, and annual income. Pagaya's artificial intelligence (AI)-powered platform looks beyond those basic data points and digs deeper into a customer's previous purchases, online activity, job history, psychological profile, and other proprietary data to craft a more comprehensive profile for lenders.
Image source: Getty Images.
That extra data can help younger customers who haven't had the chance to build up a high credit score yet, and it can expose hidden risks with customers who have high incomes and credit scores. Pagaya claims this approach will eventually disrupt the legacy credit rating system.
Pagaya might sound a lot like Upstart Holdings (UPST 2.76%), which also uses AI-powered tools to help lenders approve loans. However, Pagaya's business model is simpler and more streamlined.
Upstart provides a wide range of loans -- which are actually funded by its partner banks, credit unions, and auto dealerships -- on its own website. As an intermediary, it charges its partners fees to provide the loan. Pagaya doesn't offer any loans of its own. It merely provides its white-label technology to financial institutions like Visa, SoFi Technologies, and Ally Financial, and it earns a fee whenever its platform is accessed to process a loan.
Pagaya's long-term projections
During its investor presentation last September, Pagaya painted this rosy picture of its long-term prospects:
|
Period |
2021 |
2022 |
2023 |
|---|---|---|---|
|
Network Volume |
$4.43 billion |
$7.67 billion |
$12.75 billion |
|
Growth (YOY) |
177% |
73% |
66% |
|
Total Revenue |
$407 million |
$679 million |
$1.09 billion |
|
Growth (YOY) |
311% |
67% |
60% |
Data source: Pagaya Technologies. YOY = year over year.
At the time, many investors were skeptical because SPAC-backed companies had a tendency to exaggerate their long-term growth potential to attract more investors. But in April, Pagaya revealed that its network volume had increased 208% to $4.9 billion in 2021 as its revenue surged 379% to $475 million. That big beat suggested its expectations for 2022 and 2023 were actually too low.
Last September, Pagaya also predicted its network volume and revenue would grow by more than 35% in 2024 and 2025, then continue growing at a compound annual growth rate (CAGR) of at least 30% over the long term.
Pagaya's top-line growth is impressive, but it still posted a net loss of $91 million in 2021. But in its investor presentation, it predicted its adjusted operating margins would expand from 15% in 2021 to more than 20% between 2024 and 2025 -- and eventually hit 30% to 40% in the subsequent years.
Can Pagaya's fundamentals support its valuation?
Pagaya's business looks promising, but it only sold a tiny float of just over 300,000 shares (out of 459 million outstanding shares) in its SPAC-backed debut.
That move enables Pagaya's management to retain firm control of the company, but it's also created a highly volatile trading environment for its stock. Since so few shares are available, Pagaya's stock can be easily manipulated by a few large traders.
At its current market cap of $19.6 billion, Pagaya is valued at nearly 30 times its estimated sales for 2022, which makes it an easy target for the bears as rising interest rates crush the market's pricier growth stocks. By comparison, Upstart, which is expected to grow its revenue by 28% to $1.09 billion this year, trades at just two times that estimate.
Pagaya is just a meme stock ... for now
Pagaya has plenty of growth potential, but its valuation is too high, and investors won't gain more clarity regarding its financial health until it posts its second-quarter report on Aug. 16. Its low float and high volatility also make it a very risky stock to own in the current bear market. Simply put, Pagaya is still a meme stock -- and it won't be a viable investment until it pulls back to more sustainable levels.
