2023-08-17 11:11:20 ET
Summary
- Pagaya Technologies Ltd. aims to democratize access to financial products and services using data science and AI technology.
- Pagaya operates under a B2B2C model, connecting financial institutions with investors seeking exposure to consumer assets.
- Pagaya's revenue growth rates are expected to improve in 2024, with potential mid-teens growth rates.
Investment Thesis
Pagaya Technologies Ltd. (PGY) stock prospects are looking increasingly better. Here, I charge that the shares are not expensive for what they offer.
Case in point, to say that Pagaya is priced at 19x next EBITDA doesn't do this investment thesis justice. Instead, 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.
Why Pagaya?
Pagaya's mission is to democratize access to financial products and services using sophisticated data science and AI technology (although, it should be noted, that Pagaya was already touting its AI technology before it was this hyped up). Positioned as an intermediary in the financial ecosystem, Pagaya operates under a business-to-business-to-consumer (B2B2C) model, connecting financial institutions (Partners) with investors who seek exposure to consumer assets.
Through its API-integrated network, Partners utilize Pagaya's AI technology to process loan applications in real-time, leading to improved revenue growth, enhanced customer access to financial products, and decreased acquisition costs. By leveraging its data, Pagaya enhances credit evaluation accuracy, offering a win-win-win value proposition for Partners, their customers, and investors seeking diversified investment opportunities.
As you read through Pagaya your mind intuitively compares and contrasts with Upstart. Indeed, they share a mission to enhance access to financial products, utilizing technology to provide more accurate credit evaluations.
The differences are subtle. Pagaya partners with financial institutions to enhance their lending capabilities, while Upstart engages directly with borrowers, by enabling them access to nonsecure loans.
In other words, Upstart is closer to being a loan originator, compared with Pagaya, which works with financial institutions.
Revenue Growth Rates to Improve in 2024
Anyone that follows Upstart will be very much aware of the trials and tribulations that Upstart has had in the past 2 quarters. You can read my analysis on the matter.
Meanwhile, in comparison, Pagaya's results are dramatically better than Upstart's. In fact, it's difficult to imagine that despite the challenging macro environment of 2023, Pagaya has not had to downwards revise its revenue guidance since it was first announced at the start of 2023 . A remarkable feat.
Naturally, given that 2023 is so close to the end, we must now form a view on 2024. The most striking consideration is just how much easier Pagaya's comparables will be next year, relative to how high the hurdle was this year.
Meaning that investors are eyeing one more challenging quarter of approximately flat y/y revenue growth rates before Pagaya returns to growth mode.
Consequently, I believe that there's a high likelihood that in 2024 Pagaya's revenue growth rates could be in the ballpark of the mid-teens.
SA Premium
Note above, that my estimate for mid-teens CAGR is meaningfully lower than the consensus estimate, thereby providing me with a respectful margin of safety in my investment thesis.
Further Aspects to be Mindful About: Pagaya's Balance Sheet
Pagaya is burning through cash. A reasonable and fair estimate concludes that Pagaya will burn through $50 million of free cash flow in 2023. For a business that holds more than $300 million of cash on its balance sheet , this means that Pagaya is well-funded and is able to continue to invest in its growth prospects.
However, the bear case facing Upstart is not found in Pagaya. Recall, the bear case facing Upstart is that it has to hold onto the loans on its balance sheet , as creditors have minimal trust in its loans' ability to perform in line with advertising, or more concretely the ~8% gross return promised.
The same cannot be said about Pagaya, as its balance sheet is relatively clean. Not only are there no large loans attached to its balance sheet, but the business is in a net cash position. Furthermore, see the quote below from the earnings call echoing this assertion:
From a balance sheet perspective, actually quite manageable and I'll explain why. As you know, we don't actually put loans on our balance sheet. And so really our only asset on the balance sheet is the risk retention, which comes from issuing ABS and the 5% mandatory holdings that we have to put on the balance sheet.
[...] So that gives us actually a long runway to be able to continue to grow the business. Obviously, long term will diversify and actually supplement the ABS distribution mechanism with other funding products that don't have the same balance sheet requirements.
Moving on, according to my estimates, Pagaya could deliver close to $80 million of EBITDA in 2024. In actuality, I believe this figure to be the lower end of what Pagaya is likely to deliver in 2024. To support my thesis, consider this:
PGY Q2 2023
Pagaya's underlying profitability is rapidly jumping higher. As you can see above, in Q2 2023, Pagaya's EBITDA profile was up 255% y/y. Meaning, my estimate for a 60% increase in EBITDA in 2024 should be reached with ease.
Altogether, this puts Pagaya priced at 19x next year's EBITDA. A multiple that I believe is attractive.
The Bottom Line
Upon thorough analysis, it becomes evident that Pagaya Technologies is positioned for a prosperous future, justifying its current stock valuation.
What truly sets Pagaya apart from Upstart, is its lean business model. Unlike Upstart, Pagaya doesn't overburden its balance sheet to fuel growth.
Noteworthy is Pagaya's impressive traction in the financial landscape. Its B2B2C model, acting as an intermediary connecting financial institutions with keen investors, showcases its potential for growth.
Subsequent to Q3 2023, Pagaya points to signs of promising revenue growth just around the corner, which lays the foundation for an optimistic 2024.
What's intriguing is the potential for mid-teens revenue growth rates in the coming year, a testament to the company's favorable trajectory.
Furthermore, the company's projected EBITDA for 2024, which could reach approximately $80 million, lends credence to its valuation at 19 times next year's EBITDA.
In essence, Pagaya's distinctive strengths, sound strategy, and growth potential make it an appealing prospect in the financial landscape.
For further details see:
Why Pagaya Technologies Surpasses Upstart's Tech