Upstart Holdings (UPST 2.76%) captured the market's enthusiasm at the height of the bull market, demonstrating the rare feat of gaining more than 1,000% in about a year. It has lost more than 90% of its value since that time and has faded into the background as it struggles with the fallout of high interest rates and unfavorable market conditions for its business.
But there's actually an Upstart competitor that went public less than a year ago that's demonstrating strong performance despite the same conditions, and Wall Street sees a huge upside. So why isn't anyone talking about Israel-based Pagaya Technologies (PGY 7.33%)?
An intelligent way to manage credit risk
Pagaya operates an artificial intelligence (AI)-based platform that assesses a borrower's credit risk. Similar to Upstart, its system accounts for more factors than the traditional FICO score, leading to more approvals for lending partners without increasing the risk of default. The company says that partners convert 30% more potential loans into actual loans on average.
It works with many credit partners in banking, credit, auto, as well as companies such as Visa, Ally, and SoFi Technologies. It then sells its loans to large institutional lenders as asset-backed securities (ABS), and it takes fees from both sides of the equation.
Pagaya's platform uses AI to help institutional investors as well by matching their desired rates of return with the available loans. It is well capitalized, and approved loans are quickly handed off to investors.
Improving performance despite a hostile macroenvironment
If you've been following Upstart's trajectory, you already know that it hasn't performed well over the past year. In the 2023 first quarter, revenue decreased 67% to $103 million, lending volume fell 78% to just under $1 billion, and it swung to a net loss of $129 million from a $32 profit last year.
Over at Pagaya, revenue increased 9% to $187 billion, above management's expectations of $175 million to $180 million, while network volume increased 12% to $1.85 billion, above management's expectations of $1.7 to $1.8 billion. Adjusted EBITDA of $2 million was above its forecast of negative $5 million to $0. Management raised its full-year outlook for adjusted EBITDA from $15 million to $30 million from the original $10 million to $25 million.
It's now the No. 1 issuer of personal loan asset-backed securities in the U.S., ahead of Upstart, SoFi, and many more fintech companies. It secures funds up front so it's consistently well-capitalized. For Pagaya, that takes care of some of the problems Upstart is having, which is selling the loans it approves. Pagaya has developed strong relationships backed up by its robust AI capabilities that support its business. As institutions see what Pagaya offers, more are continuing to join the network. Pagaya's available loans are already oversubscribed, and the investor pool is becoming more diverse, which reduces risk.
Image source: Pagaya Technologies.
A huge market opportunity
AI credit risk is still in its infancy, with companies such as Fair Isaac accounting for the bulk of the business in the industry. There's tremendous opportunity for a company that can demonstrate its ability to do it better, and Pagaya is doing just that.
Within all of its categories, Pagaya sees a market opportunity of more than $5 trillion, of which it has less than 1%. That may be another edge it has over Upstart, in that it has already entered most of its markets and is recruiting partners for all sorts of credit products. It recently made its first acquisition, buying Darwin, a single-family rental property management service, to make inroads into the real estate industry.
Pagaya added six new credit partners to its platform in 2022, and with no new additions, it sees a path to quadruple its network volume to $27 billion.
Why isn't anyone talking about Pagaya?
There's still plenty of risk here between losses, with net income not likely to happen in the near future, and exposure to interest rate risk. However, that's been somewhat mitigated by its excellent first-quarter performance. If Pagaya can post these kinds of results in this hostile environment, it should do even better under more hospitable conditions. Operating in the high-interest rate environment also improves its model with more accurate data points and better risk assessment.
There are only five analysts on Wall Street covering Pagaya at the moment, and they give 12-month price targets for Pagaya stock that are as much as 249% higher than today. Granted, with the stock trading at less than $1 per share, that doesn't bring it to a high total. Then again, if you invest in a few shares today, you don't stand to lose much.
Shares are trading at a price-to-sales ratio of 1, which is incredibly cheap for a high-growth company from a valuation standpoint. That underscores how much risk investors are assigning it. This stock is only a buy for risk-tolerant investors at the moment, but I would definitely recommend keeping it on your watch list.
