Pagaya's Credit Trends Are Improving: Here's What it Means

Core Insights - Pagaya Technologies Ltd. (PGY) has shown stabilization and improvement in credit quality throughout 2025, driven by portfolio seasoning and structural changes in funding and underwriting [1] Credit Quality and Financial Performance - In the nine months ended September 30, 2025, credit-related impairment losses on investments in loans and securities declined by over $95 million year-over-year, primarily due to improved market conditions and changes in fair value assumptions [2] - The reduction in impairments is attributed to better-performing loan vintages, stable delinquency and charge-off trends, and enhanced accuracy of AI-driven underwriting models, indicating that recent cohorts are seasoning better than earlier vintages [3] - As credit-related losses decline, PGY's earnings volatility has reduced, leading to improved profitability, with three consecutive quarters of positive GAAP net income in 2025, a significant turnaround from previous years [4][10] Risk Considerations - While credit risks are becoming more manageable, PGY still faces elevated leverage and reliance on capital markets, necessitating sustained credit discipline [5] Market Position and Competitors - Upstart Holdings, Inc. (UPST) operates similarly to PGY as an AI-based lending platform but often holds loans on its balance sheet temporarily, making it more volatile [6][8] - LendingTree (TREE) differs from PGY as it is a marketplace platform that does not underwrite or hold loans, focusing instead on a fee-based digital marketplace [9] Stock Performance and Valuation - PGY's stock has increased by 126.2% over the past year, contrasting with a 4.9% decline in the industry [11] - The current price-to-sales (P/S) ratio for PGY is 1.11X, below the industry average of 3.36X over the last three years [12] - The Zacks Consensus Estimate for PGY's earnings for 2025 and 2026 has risen to $3.10 and $3.41, indicating year-over-year growth of 273.5% and 10%, respectively [15]