Pagaya Q2 ER: Mixed Results With Impressive Outlook For 2025

Core Viewpoint - Pagaya's Q2 2024 results were mixed, with revenues and adjusted EBITDA exceeding expectations, but net losses were higher than anticipated. The company announced significant partnerships and a forward flow agreement that are expected to positively impact future performance [1][11]. Financial Performance - Quarterly revenues reached $250 million, surpassing the expected $239 million, representing a 28% year-over-year growth [1]. - Adjusted EBITDA was reported at $50 million, marking the first time it exceeded this psychological barrier [1]. - Net operating cash flow improved to $29 million, indicating strong business evolution [1]. - Net losses amounted to $75 million, with adjusted EPS and GAAP EPS falling short of expectations at +$0.10 and -$1.04 respectively [1][11]. Asset Management - Losses from asset valuation adjustments on the balance sheet were primarily due to old loans with higher default rates, which have since decreased by 40% from their peak in 2021 [1][4]. - The company aims to reduce asset retention on the balance sheet to 2%-3% from the legal minimum of 5% [1][7]. Strategic Partnerships - Pagaya signed a forward flow agreement (FFA) for up to $1 billion with Castlelake, which is expected to mitigate liquidity risk [1][2]. - A partnership with a top 5 US bank was also announced, which is anticipated to enhance growth [1][2]. Future Outlook - The company targets achieving profitability and positive net cash flow by 2025, supported by ongoing revenue growth and strategic alliances [2][5]. - Total business volume for 2024 is projected to be approximately $10 billion, with a medium-term goal of reaching $25 billion [5]. Valuation Metrics - Pagaya's market capitalization is currently under $900 million, with an estimated annual adjusted EBITDA of $200 million for 2024, resulting in a valuation of just over 4 times its annual EBITDA [3][8]. - The stock is considered undervalued, with potential upside estimated at three times the current price, suggesting a target price of approximately $38 [3][8]. Margin Improvement - The company reported a record Fee Revenue Less Production Costs (FRLPC) of 4.2%, with a target average of 3.5% to 4.5% for 2024 [7]. - Gross margin improved to 42% in Q2 2024, reflecting increased efficiency and cost savings [7].