Wall Street analysts' target prices are modeled based on many factors, and each one comes up with something different. Target prices can range from a large loss to a large gain, so it doesn't make sense to base your investment decisions based on one Wall Street analyst. No matter how much information they might have right now, no one can accurately predict what will happen in the markets.
That said, there are several things to gain from paying attention to Wall Street. For one thing, when all outlooks point in the same direction, that's a vote of confidence. It means the case is compelling one way or another, and when it's toward a buy, it could signal to investors to do further research.
Consider artificial intelligence (AI) credit company Pagaya Technologies(NASDAQ: PGY). It's a stock that's been quite volatile, but Wall Street is giving it a thumbs up. Seven out of eight covering analysts rate it a buy, with one seeing 200% upside during the next 12 to 18 months, and none seeing a loss. Should investors take a risk on this stock?
Disruptive AI services for the financial sector
Pagaya is a business-to-business company serving the financial sector with AI-driven risk management solutions. It has a two-way platform for partners to evaluate credit risk from potential borrowers and make automated decisions, as well as for institutional investors to buy loans bundled as asset-backed securities.
For a young company, it already has an impressive list of credit partners, like SoFi Technologies and U.S. Bank. It has a goal of onboarding three to four large clients annually, and it recently expanded its partnership with LendingClub to include its core loan product. It also recently signed with OneMain Financial, a top-five U.S. loan company, and it's in the process of onboarding another top-five bank for its point-of-sale (POS) product. These partners rely on Pagaya's platform to evaluate credit and make appropriate loan approvals, increasing its cash leverage without adding risk.
On the institutional side, Pagaya has a formidable business backed up by $4.4 billion in funding agreements so far this year. It also just signed its first forward flow agreement for $1 billion, giving it greater flexibility in loan originations.
It's just getting started
Pagaya has been reporting robust growth despite the challenging economy, demonstrating resilience while similar companies have been struggling. Network volume increased 19% year over year in the second quarter, and revenue was up 28%, beating expectations.
It's not profitable yet, but profitability is improving. Its favored bottom line metric, fees from revenue less production costs (FRLPC), increased 49% from last year to $97 million and also expanded as a percentage of network volume, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased from $17 million to $50 million. Adjusted net income, which takes out the stock-based compensation typical for newer companies, was $7 million.
It's made several important moves since the end of the second quarter. It recently acquired data management company Theorem, which provides solutions for institutional investors, and that expands Pagaya's institutional funding ecosystem. It also, together with LendingClub, acquired part of Tally Technologies' credit card management platform.
Pagaya offers a variety of products for different kinds of loan types including personal loans, auto loans, and credit cards. Most of these are just getting off the ground and have a tremendous growth runway as Pagaya onboards new clients and increases network volume.
It's developing its POS product, which it believes can grow to 30% of its business, and it is working with Mastercard to drive its installment payment product. It also works with Klarna to power its installment plans.
It comes with plenty of risk
The possibilities here are exciting, but they're not without risk. There are the general risks associated with young, unprofitable companies that are trying to make their way. However, Wall Street expects Pagaya to turn profitable by the end of next year.
There are some specific risks here, too. Pagaya concentrated its stock in a 1-for-12 reverse stock split in March. Just like the market loves a good stock split, it isn't very fond of reverse stock splits, which often indicate some kind of trouble. On the heels of that, it issued new stock at a lower price than the market, which caused it to drop further.
Pagaya stock is down almost 30% this year, and it could be an incredible stock to supercharge a growth portfolio. However, it's not a stock for the average individual investor, and only those with a strong appetite for risk should consider buying it right now.
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Jennifer Saibil has positions in SoFi Technologies. The Motley Fool has positions in and recommends Mastercard and U.S. Bancorp. The Motley Fool recommends Pagaya Technologies and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
