Pagaya Technologies Ltd. (PGY, Financial) is a fintech company that uses artificial intelligence and machine learning to optimize and manage institutional investment into consumer credit. The company has recently received high ratings from Wall Street and beat top-line forecasts for growth.
In this analysis, I will break down its business model, financials and valuation.
Fintech business model
Pagaya’s business model focuses around a few core areas, including:
- Investment management (AI powered): The business uses machine learning algorithms to analyze huge amounts of consumer credit, then use the data to make investment decisions into loan portfolios.
- Securitization: The company also “securitizes” loans, turning them into asset-backed securities and easily sellable financial products.
- Asset management: This business covers a range of consumer credit types, from auto loans to mortgages and personal loans.
Its revenue model focuses on charging management fees for its asset management. In addition, the business earns a portion of interest from the loans it invests into, as well as fees from the sale of its securitized financial products.
Big data and partnerships
Pagaya is also a play on “big data” as the company collects a huge amount of information on loans. This data is often sold to financial institutions to help inform the underwriting (risk assessment) of new loans.
The company uses more data sources than a traditional linear regression model. This means loan applicants that do not meet a particular FICO score could still be lent to thanks to the extra data. This helps to drive a great acceptance rate on applications and thus, extra revenue for its clients.
It partners with banks, fintech companies and other lenders. By offering the aforementioned loan assessment system, it helps its partners to absorb risk from its balance sheet.
Acquisitions
In January, Pagaya acquired Darwin Homes, a leading property technology company. The idea behind this acquisition is to create a data-rich offering in the single-family rental industry.
Darwin was founded by two founding members of the DoorDash (DASH, Financial) team, Zach Kinlock and Ryan Broderick. The duo will continue to lead the business, so it looks to be in good hands.
Growing financials
Pagaya Technologies reported strong financial results for the second quarter. Its revenue of $196 million increased by 8% year over year and beat analyst forecasts by $7.88 million. Its revenue from fees contributed to 95% of the total, rising by 14% year over year.
The business raised a staggering $3.1 billion across its asset-backed securities deals, including an $800 million personal loan deal won in July.
The company reported loan delinquencies declined, while its average coupon remained stable. This is a strong positive for the accuracy of its credit decisioning system, which is important given the macroeconomic environment.
Its take rate, as a percentage of network volume, increased by 110 basis points year over year to 9.5% and was stable quarter over quarter.
Production costs did increase by 15% year over year and contributed to 6.2% of network volume, up 80 basis points over the prior year.
This resulted in a gross profit of increase of 12% year over year and 30% quarter over quarter.
The higher margin on the lending side of its network has helped to offset the lower fees driven by the higher cost of credit.
Cost-saving initiatives
Its total research and development, sales and marketing and general and administrative expenses were $85 million in the second quarter, down substantially from the prior year. Since the first quarter, the business has aimed to deliver $50 million in cost savings throughout 2023.
Pagaya has made good progress as it reduced its cost savings initiative, which includes both compensation and non-compensation expense reductions, by $12 million.
Positive earnings and outlook
Adjusted Ebitda was $17.5 million for the quarter, up substantially from $5 million in the prior-year quarter. During the earnings call, management expressed confidence and and raised the outlook for both expected network volume and adjusted Ebitda.
Pagaya has a solid balance sheet with $306.2 million in cash and short-term investments. The company also has total debt of $358 million.
Valuation
Pagaya Technologies trades at a price-sales ratio of 1.44, which is cheaper than historic levels.
The company recently achieved a “moderate buy” average rating from six research firms, according to Bloomberg data. Four out of the six analysts gave a buy rating and two a hold rating.
The firms also offered an average price target of $3.43, up substantially from the $1.50 range at the time of writing.
Investor activity
Throughout the year, a variety of financial companies have purchased shares of Pagaya Technologiesk.
For example, Orin Green Financial opened a new $26,000 position in Pagaya Technologies. Harel Insurance also increased its stake by 117.1% and now owns 28,635 shares, which are valued at $29,000. Jefferies Financial Group purchased $31,100 worth of stock.
Final thoughts
Pagaya Technologies is a leading fintech company that appears to be gaining traction. Its loan product is best in class and offering lower risk and higher acceptance rates for its banking and fintech partners. Its acquisition stategy also looks to be a solid play due to its strong management team. Therefore, it appears to be a potentially solid long-term investment.
