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On August 26, 2024, Benchmark analyst Mark Palmer began coverage on Pagaya Technologies 
PGY with a Buy rating and a price target of $21. This target suggests significant upside potential of 56% from the current trading price.
Palmer’s optimistic outlook was driven by Pagaya’s strategic progress, particularly in the area of AI-powered credit decisions, despite the company’s recent share price decline.
The analyst noted that while some investors may have focused on negative data – such as the $58 million loss from the fair value measurement of older loans – there were also substantial positive developments that positioned the company for future growth and profitability.
KBW’s reporting
In June, Keefe, Bruyette & Woods (KBW) began coverage on Pagaya and gave it an outperform rating, highlighting the value the company offers to large lenders.
KBW analyst Sanjay Sakhrani highlighted the unique benefits of the Pagaya platform, particularly that it enables lenders to maintain customer relationships even if they do not directly provide the loans.
This strategic advantage, along with the company’s plan to be cash flow positive by 2025, contributed to the favorable outlook.
Strategic partnerships and financing agreements
Pagaya’s recent strategic moves have significantly strengthened its operational and financial position.
In early August 2024, Pagaya entered into a forward flow agreement with Castlelake LP that allows Castlelake LP to purchase up to $1 billion worth of consumer loans originated through Pagaya’s platform.
The aim of this agreement is to diversify Pagaya’s sources of financing while reducing the company’s dependence on its own capital for lending.
Additionally, the company has entered into a new partnership with OneMain Financial, which will leverage Pagaya’s technology to expand its customer base.
These developments not only expand Pagaya’s reach but also enhance the company’s ability to scale efficiently, which is critical as the company continues to grow its network of over 120 institutional investors.
Earnings and financial development in the second quarter
In its second-quarter 2024 earnings report, Pagaya reported mixed results: revenue beat expectations, but non-GAAP earnings per share fell short.
The company reported revenue of $250.34 million, a 28% increase year over year, driven by a 31% increase in fee income.
However, Pagaya also reported a net loss of $75 million, primarily due to non-cash adjustments to older loans.
Nevertheless, the company achieved record adjusted EBITDA of $50 million, exceeding its guidance and reflecting improved operating efficiencies.
Pagaya’s management remains confident and has raised its full-year 2024 guidance for both revenue and adjusted EBITDA, underscoring the company’s strong growth trajectory.
Fundamental strengths and headwinds
The company’s AI-powered loan decisioning platform continues to gain traction, evidenced by the addition of a new top-5 bank to its POS space and the expansion of its partnership with LendingClub.
In addition, the fact that Pagaya was able to receive a AAA rating for its ABS program for private loans for the first time underlines the increasing quality of the loans brokered through the platform.
Despite these positive developments, Pagaya faces several challenges. The company’s net losses, which are largely due to write-downs on retained loans, continue to worry investors.
These losses are partly due to older loans with higher default rates, although the company has made great strides in reducing these risks by improving its AI algorithms and focusing on more creditworthy applicants.
In addition, Pagaya’s capital-intensive business model, which requires significant upfront costs for onboarding new partners and meeting compliance requirements, presents an ongoing challenge.
It is crucial for the company’s long-term success that it keeps these costs under control while continuing to grow.
Pagaya shares currently undervalued
Pagaya’s valuation metrics suggest that the stock is currently undervalued.
With an adjusted EBITDA forecast of $200 million for 2024, the company trades at 4.5 times forward EBITDA, which is considered a bargain in the fintech space.
This low valuation, combined with Pagaya’s robust growth prospects, suggests significant upside potential.
Compared to competitors such as Upstart, Affirm and LendingClub, Pagaya’s valuation appears particularly compelling, especially given recent improvements in its business model and operational efficiency.
Profitability outlook
Looking ahead, Pagaya’s strategic focus is to achieve profitability and positive net cash flow by 2025.
The company plans to reduce the proportion of assets reported on the balance sheet from the current 5% to 2-3% through various financing instruments such as the forward flow agreement with Castlelake.
In addition, Pagaya aims to further improve its margins by leveraging economies of scale and improving operating efficiency.
With existing strategic partnerships, a path to profitability in sight and strong revenue growth, Pagaya is positioned to leverage its technological strengths.
However, the market will be watching closely to see how effectively the company manages its risks and achieves its ambitious targets.
With these fundamental factors in mind, the next logical step is to examine how this dynamic is reflected in the stock’s price movements and what the technical indicators say about its possible future development.
In the range between 9 and 15 US dollars
Pagaya shares rose rapidly from $13 to over $30 in the third quarter of last year, only to fall back to $13 in the following quarter.
Since March of this year, the stock has been trading in a range of $9 to $15.
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As long as the stock remains in this trading range, neither bulls nor bears should expect any major price movements.
However, in recent weeks, the stock has hit support near the $11 level several times, which is a good sign for bulls.
Therefore, investors who are optimistic about the stock can open long positions at current levels with a stop loss at $10.72.
Traders who remain bearish on the stock will have to wait until it reaches nearly $15 before opening short positions.
