We came across a bullish thesis on Pagaya Technologies Ltd. (PGY) on Substack by Unconventional Value. In this article, we will summarize the bulls’ thesis on PGY. Pagaya Technologies Ltd. (PGY)’s share was trading at $11.31 as of Feb 11th. PGY’s forward P/E was 7.13 according to Yahoo Finance.
A couple in their kitchen signing loan documents to expand their small family business.
Pagaya is positioning itself as a transformative force in the U.S. consumer credit markets, an arena that is broadly inefficient and inaccessible to many. The company’s core thesis centers around a significant, creditworthy population that remains outside traditional lending markets, primarily due to high search costs and a lack of information. Traditional credit models, which rely heavily on FICO scores, often fail to effectively capture risk across various segments of the population. Pagaya believes AI can more precisely measure default risk, offering a path to expanding credit access to underserved consumers who are typically overlooked by conventional lending models.
AI’s role in the lending space is crucial as it allows for better risk prediction, making it a more scalable and effective solution compared to traditional, rules-based models. While the application of AI in lending has been met with skepticism, especially given the failures of past attempts, Pagaya’s model is gaining traction. The company has originated over $26 billion in loans, with $10 billion expected in 2024 alone, capturing about 70% of the personal loan ABS market. Pagaya’s success in leveraging a unique AI model and vast data supply is already transforming how loans are underwritten, enabling them to extend credit to a wider pool of borrowers. While the performance of these loans has varied, it has been adequate enough to keep investors confident and willing to allocate more capital into the business.
Traditional banks are ill-suited to replicate this model. Most banks operate on outdated, siloed tech stacks that cannot integrate the data necessary for AI-driven lending models. They also lack the commitment, budget, and technical staff to build and deploy the technology required to compete in the modern credit landscape. This creates an opportunity for Pagaya, which can aggregate data across many lenders, providing a solution that banks can adopt without overhauling their entire infrastructure. Pagaya’s network is well-positioned to meet this need, offering plug-and-play, compliant solutions that banks can easily integrate.
The company’s network model is also key to its expansion. By connecting borrowers with lenders (capital providers), Pagaya facilitates an ecosystem where both sides benefit. Lending partners gain the ability to offer credit to consumers they would otherwise turn away, while investors gain access to diversified credit assets at scale. This mutually beneficial relationship drives growth, as more lending partners lead to more loan origination opportunities, and more investors attract more borrowers. The network’s expansion is essential, with Pagaya already onboarding new partners at a steady pace, including significant players like US Bank and OneMain Financial. While onboarding new partners is not the immediate constraint, ramping up existing partnerships and expanding share of originations among them will drive near-term growth.
Pagaya’s future growth also hinges on its ability to expand the scope of its offerings. New products like pre-screening are designed to capture a larger share of existing customers, and over time, the company aims to take on more of a bank’s end-to-end lending value chain. This expansion naturally feeds into further growth, as deeper relationships with partners and a wider array of services allow Pagaya to increase its share of partner originations.
Overall, Pagaya presents a high-risk, high-reward opportunity. The company is addressing a difficult problem that many others have failed to solve, and while there are uncertainties about its future, the potential reward of successfully scaling its AI-powered lending network makes it a compelling investment. With its growing network and expansion into underserved lending segments, Pagaya is well-positioned to disrupt the consumer credit market and deliver substantial returns for investors over time.
Pagaya Technologies Ltd. (PGY) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 21 hedge fund portfolios held PGY at the end of the third quarter which was 20 in the previous quarter. While we acknowledge the risk and potential of PGY as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PGY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.