Is Pagaya Stock (PGY) a Promise Despite Negative Returns

Trading News - In the last month, Pagaya Technologies Ltd., the AI-driven consumer lending platform, has been on a robust course with its stock price surging by 50%. This steady climb has been attributed to a complex network of factors that signify the potential for a promising future, one that investors should be attuned to. The question is whether the returns are worth the potential risk of a currently $1.20 stock price. In my view, the potential upside outweighs the risk.

As of now, Pagaya stands as a 'B2B2C' entity. The end consumers, although oblivious to their interaction with Pagaya, benefit from its services, a conduit of which are the sales and financing firms. These firms integrate Pagaya's AI into their workflows, a strategic move that enhances their loan acceptance rates and bolsters sales. From various Tegus network interviews, the consensus about Pagaya is that it has been instrumental to the growth of their business. The integration of Pagaya's services into their operations has been relatively seamless, with hardly any technical hiccups plaguing the process.

Analyzing the technical figures, the Q2 network volume stands at $2 Billion. This shows a 0% sequential network volume growth, which initially may seem surprising. However, when we consider that the market is in good shape and investor demand for PGY securitization at its peak, this could be interpreted as a conservative projection. A plateau in Q2's growth would not only be unexpected but also a missed opportunity considering Pagaya's strong position to support and achieve growth.

The expenses ex-production costs have seen a marginal decrease from $95M in Q4'22 to an estimated $83M in Q2'23, largely attributable to a reduction in force, which led to one-time severance costs in Q1. This downward trend in expenses combined with a rise in gross margin from higher network volumes paints a promising picture of the potential for the company to post a $10M EBITDA number, beating their guidance of $7.5M.

The business is at a crucial juncture now, where both Network Volume and FRLPC % (the contribution margin from every additional $1 of network volume) play a critical role in shaping its future. Despite the business's current size, an extra $2 Billion (25% growth) in revenues could potentially add $50m+ in EBITDA, assuming a 3% FRLPC.

Turning to its performance in a challenging environment, Pagaya has displayed strong earnings results in the first quarter. Network volume and revenue both saw a significant increase compared to the previous year, standing at $1.85 billion and $187 million respectively, which led to an adjusted EBITDA of $2 million. Despite a net loss increase from $18 million to $61 million in the first quarter, the company's growth trajectory doesn't seem alarming, taking into account the company's age and the hostile operating climate.

The company's broad range of partnerships, including those with leading brands like Visa and SoFi, is indicative of the firm's potential to grow explosively if its platform continues to show an improved risk assessment compared to traditional scoring models. However, this comes with the understanding that the company's path to net profits will not be immediate and will entail risk for investors.

However, it hasn't been all smooth sailing. The consumer credit fund of Pagaya, Pagaya Opportunity, recorded a negative return of 4.9% in May, the deepest in its history, which is considered an anomaly in the P2P lending industry. The negative return could be attributed to a default by borrowers or a negative valuation of the credit portfolio due to an expected increase in defaults with rising interest rates in the US.

Additionally, the loan default rate, as reported by the company, saw a significant uptick in Q1 2023. The default rate went up from 4.8% in the previous quarter to 7.1%, mainly due to an increase in unsecured consumer lending during the pandemic. This implies that more of Pagaya's customers are failing to meet their debt obligations. However, it's essential to consider the broader context of economic volatility and widespread financial hardship resulting from the pandemic.

Pagaya PGY Stock Real Time Price >

Investors must also note Pagaya's reliance on artificial intelligence and machine learning for its risk assessment. While these tools have allowed Pagaya to quickly scale its operations and secure partnerships with other lenders, it does pose an element of risk. Machine learning models are notorious for their "black box" problem, in which the decision-making process is obscured and difficult to interpret. If Pagaya's models start to fail, it could have severe repercussions for the company.

The company has taken proactive measures to mitigate this risk. They have a diverse and experienced team of data scientists continually working on refining the models, conducting stress tests and scenario analyses to ensure the AI's reliability. Further, the firm is investing heavily in research and development to enhance its machine learning capabilities and stay ahead of the competition.

In conclusion, Pagaya's long-term potential seems strong given its robust technological foundation, strategic partnerships, and improving financial performance. However, investors should be aware of the risks associated with its AI reliance and increasing loan default rates. Investors with a high-risk tolerance and long-term perspective may find Pagaya's growth prospects attractive, especially considering the current stock price of $1.45.

That's TradingNEWS