What happened
Shares of Pagaya Technologies (PGY +3.66%) stock tanked another 23% in October after losing 84% of their value in September according to data provided by S&P Global Market Intelligence. The company, which was taken public by a special purpose acquisition company (SPAC) deal in June, is feeling the blow of rising interest rates, as well as a sell-off due to the end of a lockup period and a secondary stock offering.
So what
Pagaya went public last June, and after an initial drop in its price, its stock reached as high as $27 in July. It has made a rapid descent from those highs.
Part of its original attraction was due to its low float, or the amount of stock available on the market. That sparked investors to grab some. However, the Federal Reserve's increase in interest rates directly impacts Pagaya's core business. Pagaya uses artificial intelligence to help company partners price loans and other forms of credit, and it sells loans to institutional investors.
NASDAQ: PGY
Key Data Points
The company was demonstrating impressive growth in its first quarter as a public company and in the time leading up to its initial public offering. Revenue increased 83% in the second quarter, with earnings before interest, taxes, depreciation, and amortization (EBITDA) of $4.9 million. Net loss was $146 million, most of which was due to share-based compensation.
Since its business is based on loan volume, it is directly impacted by changes in interest rates. In this high-interest environment, lenders are more cautious about loan approvals. That's likely to mean less volume and lower sales.
As the lockup period for worker compensation came to end, Pagaya issued a secondary stock offering, flooding the market with new shares and diluting the share value.
Now what
Lending platform Upstart Holdings, which provides a similar platform, announced yesterday that it's laying off 140 workers due to the economic environment and lower volume. That doesn't bode well for Pagaya.
However, Pagaya has a more diversified product line than Upstart. For example, it partners with Visa, the largest credit card network in the world. Visa posted a 22% sales increase in the 2022 fiscal fourth quarter (ended Sept. 30). That's the kind of revenue stream that gives it a boost when facing challenges in the loan segment.
The stock price drop in October looks like a continuation of negative sentiment, especially approaching the third-quarter earnings report next week. Pagaya stock is trading at $1.42 as of this writing. That looks enticing for a company with high growth potential, but it's very risky right now.
