Title: Trade Alert: Accumulating Pagaya Technologies (PGY) at $1.16 – A Promising Fintech Play
Tags:
- Pagaya Technologies
- Trade Alert
- Stock Purchase
- Fintech
- AI Technology
- Investment Strategy
- Asset Backed Securities (ABS)
- Speculative Buy
- Financial Services
Trade Alert
Bought Pagaya at $1.16 – I had recommended this as a speculative buy on 2/5/2024, and continue to accumulate up to 1.20 to 1.25.
The article on Pagaya was out on Seeking Alpha for a complete read, linked below, it’s long and comprehensive and lays out the risks and rewards.
These are my reasons to buy:
Pagaya is a Fintech, pick and shovels, AI play providing a platform/software service to commercial lenders like Visa, banks, and even Fintech competitor SoFi Technologies (SOFI). It has an excellent de-risking AI business model at scale for lenders and investors.
Pagaya doesn’t keep any loans on its books, except a small percentage of securitizations made by them for mandatory risk retention compliance.
It charges fees to business clients (lenders) like Visa (V), Ally Financial (ALLY) and SoFi Technologies to provide due diligence and credit analysis of their potential borrowers – sift through their initially-declined loan applications, and find any good loans among the declined ones.
Pagaya bundles these loans and moves them to their final destination – investors. 80% of the loans get bundled into ABS, (Asset Backed Securities), which institutional clients have agreed to purchase in advance. The other 20% of the bundled loans are sold to private investors, and Pagaya charges them a fee for that service
Switching Costs – It takes Pagaya and the lender about 2-3 years to complete onboarding and integration. Clients are likely to remain loyal.
It has strong capital and institutional Backing – The Singapore Government Fund, which owns 9% of Pagaya is also a large buyer of ABS.
Pagaya has a large and very credible pipeline, a unique business model, which de-risks the lending business in real time and a platform that works across several products and lenders.
Challenges, weaknesses and threats
This is a Cutthroat, Commodity, Cyclical business and sure there is the AI product differentiator, but over time, even M/L or AI platforms or software will become a commoditized business, without significant competitive advantages.
Network volume flatlined in Q1-2022, at 1.6Bn, then stagnated at $1.9Bn in two quarters of 2022, with even one decrease to $1.8Bn. We finally saw growth renewing in Q1-2023 to $1.9Bn.
Barriers to entry are low – for example, their lender customers could easily develop the same software. Their lenders who are much bigger, SoFi Technologies itself is $7.5Bn in market cap, a little less than 10 times Pagaya’s size, — could become their biggest competitors by investing in similar AI software for themselves, eliminating Pagaya and shopping their product around like AWS.
Dilution – Another challenge is the possibility of continued dilution. Share count stood at 738Mn shares in Sep 2023 compared to 667Mn in Sep 2022, an increase of 11%…
Valuation
Pagaya is priced at only 1.05 times sales and with an estimated Sales CAGR of 22%, this drops to 0.6x sales – it had current assets of $419Mn in Sep 2023- that’s about half its market cap of $855Mn ! That’s a steal! Compare that to SoFi, which is priced at 3.7X sales and has a 3 year forward CAGR of 19% lower than Pagaya. Plus, SoFi earns only a part of its revenues from services, they earn interest income as well, which carries credit risk.
They will soon be listed in the US – that itself could be a huge boost.
And can also benefit from a reverse stock split, which removes the cheaper branding of a $1 stock.
Sure there are risks, but I believe most of them are already priced in at a low price of $1.13, and the upside could easily be $4 to $5 in a few years.