Why Pagaya Technologies Collapsed 84.8% in September

What happened

Shares of Pagaya Technologies (PGY 2.98%) plummeted 84.8% in September, according to data from S&P Global Market Intelligence. The artificial intelligence (AI) provider for financial companies offered a dilutive secondary-stock sale and was hit by rising interest rates and fears of loan delinquencies. As of Oct. 4, shares are down 82% since the company went public through a special purpose acquisition company (SPAC) earlier this year. 

So what

There wasn't any big news around Pagaya's business in September, but there was major news around a stock offering and macroeconomic developments. Near the end of the month, Pagaya released a filing with the U.S. Securities and Exchange Commission (SEC) stating it intended to sell 46.1 million new shares to the public and that 674 million existing shares from insiders would be sold as well. 

Pagaya has just over 851 million weighted average shares outstanding as of the end of last quarter, so these stock offerings likely ended up bringing on a huge amount of selling pressure. With so many people looking to sell, it is not surprising that the stock plummeted around the days of the announcement. New public companies typically debut with a low float (amount of shares publicly traded) which can drive up the price in the near term. When shares get unlocked, the stock can face major downward pressure.

On top of this huge stock offering, Pagaya was impacted by the Federal Reserve's decision to raise interest rates again in September. When the Fed raises rates, it makes it tougher for borrowers across the economy to obtain financing and could impact the credit markets. For Pagaya, a company that powers loans with its AI platform, this was not good news, and investors likely sold the stock because of it.

Now what

Pagaya's collapse is another datapoint that shows why investors should avoid newly public companies. The executives are unproven, the share price can trade wildly, and you have limited financial information to go off of. Usually, it is best to wait at least a few quarters -- and ideally a full year -- before investing in a new IPO you are excited about. That way, you can avoid all the potential noise, like what is happening to Pagaya right now.

Down over 80%, Pagaya could be a buy if you believe in its AI platform over the long term. But with the double whammy of rising interest rates and the huge secondary offering, it is no surprise the stock collapsed last month.