Pagaya: Patience Should Pay Off

Core Viewpoint - Pagaya Technologies Ltd. presents an intriguing investment opportunity in the fintech sector, despite its stock trading at all-time lows due to market complexities and reliance on funding partners [1][10]. Financial Performance - Pagaya reported a strong Q1 with revenues increasing by 31% to $245 million, surpassing analyst estimates by $17 million and beating EPS targets by $0.04 [2]. - The company achieved record network volumes of $2.4 billion and improved Fee Revenue Less Production Costs (FRLPC) to $92 million, resulting in a 3.8% margin [2]. - Adjusted EBITDA rose significantly to $38 million from just $2 million in Q1 '23, driven by an 84% year-over-year growth in cost efficiency [3]. Funding and Capital Structure - Pagaya relies heavily on bank partners for funding new loan originations, attracting $1.9 billion in funding across five transactions during the quarter [4]. - The company has a net loan and securities balance of $804 million and a cash balance of $310 million, offset by $458 million in debt, resulting in a net capital position of $656 million [7]. - A recent equity offering raised $95 million, part of a larger strategy to secure $330 million in capital for loan retention [6]. Market Valuation - The stock has a market cap of approximately $800 million, with 2024 revenue guidance approaching $1 billion and targeted adjusted EBITDA of $150 to $190 million, indicating a valuation of less than 5x targets [8]. - Investors are effectively paying a minimal amount for the AI lending platform, which generates nearly $1 billion in fee income [8]. Strategic Initiatives - Pagaya is developing a new point-of-sale (POS) product as an alternative to traditional buy now, pay later solutions, with U.S. Bank's Merchant Services recently signing on [5]. - The company faces challenges in scaling its lending platform, similar to other fintechs that have either acquired digital banks or built their own to diversify income sources [9]. Investor Considerations - The stock's low valuation, combined with strong revenue growth, presents a compelling investment case, although patience may be required as fintech stocks are currently out of favor [11].