What happened
Shares of Pagaya Technologies (PGY 1.84%) stock gained 25% in May, according to data from S&P Global Market Intelligence. Investors were impressed with its first-quarter earnings report.
So what
Pagaya operates a credit evaluation platform similar to popular stock Upstart Holdings, but it hasn't gotten nearly the same amount of market adulation. It went public in 2021 through a special purpose acquisition company (SPAC) offering, which was all the rage at the height of the previous bull market but has now earned strong investor pessimism.
Pagaya's platform uses artificial intelligence (AI), today's investing buzzword, to power its model and make what it says is a much more accurate assessment of a borrower's ability to pay back loans. As lenders increase their loan rates responsibly, they make more money, and borrower's get greater access to credit, a win-win for all around (even investors). An important part of the model is that Pagaya sells the loans its powers to institutional investors as asset-backed securities, and it has billions of dollars in upfront funding to keep the money flowing and the model working.
Sales growth has been strong for this young and growing company, but profitability has been pressured. In the high-interest-rate environment that's been cruel to Upstart's business, investors haven't been keen on Pagaya stock --until now.
In the first quarter, Pagaya demonstrated robust earnings results despite the hostile operating climate. Network volume increased 12% over last year to $1.85 billion, and revenue increased 9% to $187 million. Adjusted EBITDA, which accounts for stock-based compensation, non-recurring charges, and other short-term expenses, was $2 million. All of these numbers soundly beat guidance, and management raised the full-year outlook for adjusted EBITDA.
Now what
Pagaya partners with many strong brands, including Visa and SoFi, and works in a broad range of credit products. It sees a total addressable market of around $6 trillion, of which it has a tiny portion. It's demonstrating competitive growth under difficult circumstances.
If its platform does a better job at assessing risk than traditional scoring models, which haven't changed in decades, it could seriously explode as a growth company. So far it's showing it can do that, and partners are joining the platform. But it will take time to fully ripen into its capabilities as potential clients take the leap and jump in.
Pagaya is still nowhere near net profits, and net loss increased in the first quarter from $18 million to $61 million. That's not alarming considering the environment and how young the company is, but it adds risk to owning the stock. Pagaya stock is trading at the cheap valuation of 1.3 times trailing-12-month sales, but right now, it's only for the risk-tolerant investor.
