2023-12-06 09:18:00 ET
Summary
- Pagaya Technologies is a company focused on investment technology.
- The company's near-term prospects are promising.
- Pagaya Technologies is experiencing significant revenue growth rates.
Investment Thesis
Pagaya Technologies ( PGY ) is well-placed to deliver compelling returns in 2024. Here I describe what Pagaya does while remarking on its near-term prospects.
Furthermore, I describe how its revenue growth rates will stabilize in 2024, making its business look meaningfully more stable and attractive.
Finally, the business is not expensive coming in at my estimated 7x next year's EBITDA.
Rapid Recap
In my previous bullish analysis back in August, I said,
I point to the fact that Pagaya's investment thesis is dramatically stronger than that of Upstart Holdings ( UPST ). Why? Primarily because Pagaya doesn't need to lean on its balance sheet to support its growth.
The business is much cleaner and leaner than Upstart's, with Pagaya's revenue growth rates likely to start to improve after the next quarter, Q3 2023.
There's a lot to be bullish about here.
Admittedly, Pagaya's performance hasn't been great since I made that assertion above.
Michael Wiggins De Oliveira on PGY
However, I now see that its prospects are even better than they appeared in August.
Pagaya Technologies' Near-Term Prospects
Most people start their research on Pagaya by comparing the business model to Upstart, so we'll start here too.
Regarding their funding models, Pagaya and Upstart diverge in their core approaches to lending.
Pagaya primarily concentrates on asset management and credit securitization, leveraging data analytics to optimize returns on existing loan portfolios and alternative credit assets.
Conversely, Upstart operates a lending platform driven by AI, focusing on providing personal loans to consumers. Upstart's revenue is closely tied to the origination of loans, making it more reliant on a consistent flow of borrowers.
In a high-interest-rate environment with diminished loan demand, Upstart's funding model might face challenges, as the number of borrowers seeking personal loans tends to decrease. Pagaya's funding resilience may be comparatively stronger due to its emphasis on alternative credit and asset management, which can still attract investor interest even in less favorable economic conditions.
With interest rates expected to lower, both these business models should perform strongly.
Moving on, Pagaya's near-term prospects appear attractive. The company's strong financial performance in the third quarter, marked by exceeding the high end of their guidance across key performance indicators, showcases robust momentum in their business.
Notably, Pagaya achieved a significant milestone by surpassing $2 billion in network volume for the first time, driven by strategic partnerships with major financial institutions such as Ally Financial and Klarna. The integration of their products with Ally's network of dealerships across 41 states, as well as the doubling of Point of Sale Application volume, highlights the tangible impact of these collaborations.
The company's ability to navigate challenging market conditions, including banks tightening lending standards and the increasing role of private credit, positions Pagaya as a key player in offering attractive solutions to both lending institutions and asset managers.
Looking forward, Pagaya is poised for further expansion with the addition of transformational partnerships, exemplified by integrating their personal loan products with a top-five U.S. consumer bank and establishing connections with major players in the auto lending industry such as Westlake Financial and an OEM auto captive finance company.
These partnerships are anticipated to significantly contribute to Pagaya's total volume over the next few years, aligning with the company's ambitious goal of reaching $25 billion in network volume.
To sum up Pagaya, it's determined to diversify its revenue sources and with a focus on three key strategic initiatives — expanding product integration with lenders, improving conversion rates through technology and AI enhancements, and delivering high-quality financial products at scale.
Given this background, let's dig into its financials.
Revenue Growth Rates Will Stabilize in 2024
The first half of 2023 saw Pagaya's revenues struggle against the same period a year ago. However, as its comparables now start to ease up, as Pagaya heads into 2024, it will be much easier for Pagaya to report stable and attractive growth rates.
Presently, the analyst community is expecting mid-20% CAGR from Pagaya in 2024, a range that I also believe to be achievable. Particularly when we consider that Q4 2023, despite the challenging comparables with Q4 of the prior year, still allows Pagaya to reiterate above 20% CAGR at the high end of its guidance, goes a long way to reinforce this thesis, Pagaya's 2024 will see around mid-20s% CAGR, leaving this company in a much better position than 2023.
And for investors, there are few narratives they like more, than a company that's turning around its prospects.
PGY Stock Valuation -- 10x EBITDA Already
During the earnings call , Pagaya described how its business is focused on attractive unit economies, pointing to its record adjusted EBITDA of $28 million, thereby reaching a significant annual run rate milestone of over $100 million.
This implies that this business is priced at about 10x EBITDA. Naturally, the question that we are now interested in is how will 2024 fare?
For that, consider this, last year's Q3 saw Pagaya's bottom line deliver negative $5 million of EBITDA. This time around, not only was Pagaya's EBITDA in positive territory, but it jumped significantly into positive territory.
It doesn't appear to be much of a stretch to imagine that Pagaya could in 2024 deliver $160 million of EBITDA. As a reference point, keep in mind that Q4 2023 EBITDA is already pointing towards $27 million.
This implies that Pagaya's valuation is approximately 7x forward EBITDA.
Personally, I've decided to invest in MoneyLion ( ML ) as my preferred fintech company, but I believe that Pagaya is cheap enough to be worthy of consideration.
The Bottom Line
Pagaya Technologies stands at the cusp of an exciting growth trajectory in 2024.
The company's strategic positioning in the financial landscape, underscored by key partnerships, positions it for compelling returns.
Despite facing challenges in integrating new partners and navigating economic uncertainties, Pagaya's proactive strategy positions it as a pivotal player in providing appealing solutions to lending institutions and asset managers.
The anticipation of stabilized and attractive growth rates in 2024, coupled with my estimated mid-20% CAGR next year, reinforces its turnaround narrative, making it an enticing prospect for 2024.
Moreover, Pagaya's valuation, at about 10x EBITDA and a potential forward EBITDA valuation of approximately 7x in 2024, underscores not just its growth potential but also its competitive pricing in the market.
For further details see:
Pagaya's 2024 Outlook: Stability And Mid-20s% CAGR Expected