If you're looking for a high-growth small-cap stock to add to your portfolio, check out Pagaya Technologies (PGY). This AI-driven fintech company just got a big thumbs-up from analysts at Keefe, Bruyette & Woods (KBW), with a new “Outperform” rating. KBW is impressed by how Pagaya's innovative artificial intelligence (AI)-fueled platform is providing “significant value” to lenders.
The timing couldn't be better, as Pagaya is about to join the small-cap benchmark Russell 2000 Index (RUT) later this month. Getting added to an index like that usually means better liquidity and more investor interest.
Pagaya's inclusion in the Russell 2000 follows a stellar first quarter, where it smashed revenue and EBITDA forecasts. The company reported $245 million in revenue, a 31% increase from the previous year. This is particularly impressive given the broader fintech sector's challenges, with global funding dropping 16% to $7.3 billion in Q1, the lowest since 2017. Despite this, the sector saw a 15% rise in deal activity, especially in payments technology.
Perhaps most intriguingly for potential investors, the average analyst price target for Pagaya suggests an upside potential of over 100% from current levels. So, is PGY the next big thing in AI-driven fintech? Let's take a closer look at what has Wall Street so bullish on this under-the-radar fintech play.
Pagaya's Strong Fundamentals and Market Performance
Pagaya Technologies (PGY), a fintech powerhouse founded in 2016, is shaking up the credit risk assessment and loan origination game with its AI-driven approach. By partnering with financial institutions, Pagaya is revolutionizing credit decisions and expanding access to credit for consumers.
PGY stock has been on a wild ride since going public via SPAC in 2022. Shares surged above $30 last summer before cratering to current levels around $12. However, PGY has now rebounded by about 40% off its late-April 2024 lows.
Pagaya's Q1 2024 earnings report was impressive. They posted adjusted EPS of $0.20, blowing past analysts' expectations for $0.16. Revenue hit $245.28 million, beating estimates by 8.55%.
They reported a record network volume of $2.42 billion in Q1 2024, representing a 31% year-over-year increase, with their AI network efficiency improved to 5.4% in the same period, up from 5.1% in Q1 2023.
Plus, Pagaya reported positive cash flow from operations for the third consecutive quarter, showing they're getting their financial house in order.
Pagaya's Growth Catalysts
Pagaya is making serious waves in the point-of-sale (POS) financing space. This is one of the hottest areas in consumer credit right now, and Pagaya is positioning itself to be a major player. They recently announced a partnership with U.S. Bank's Elavon, which is set to go live in the second half of 2024. Elavon is the third-largest payment processor in the U.S., so this is a huge deal for Pagaya.
On top of that, Pagaya is in late-stage talks with six more large lenders across personal loans, auto loans, and POS financing. They're aiming to bring three of these partners into their network over the next 12-18 months. Considering Pagaya already works with Klarna, which has 37 million U.S. users, adding more POS partners could be massive. In fact, some analysts think Pagaya could be processing around 50% of all Buy Now, Pay Later (BNPL) transactions by 2027, potentially generating $6.1 billion in revenue from POS alone.
Pagaya's AI-powered network is also attracting a ton of funding. In Q1 2024, they raised a whopping $1.9 billion across five transactions and added 18 new investors. They now have 116 funding partners in total. This influx of capital is letting Pagaya scale up quickly and take on more business.
For the current Q2 of 2024, analysts are forecasting adjusted EPS of $0.28 on revenue of $239 million. For the full year 2024, the consensus non-GAAP EPS estimate stands at an impressive $1.13, with revenue projected to hit $998.28 million. These figures suggest a company on a steep growth trajectory.
It's also worth noting that Pagaya operates in the burgeoning "AI-as-a-Service" space, which is projected to grow at a CAGR of 37.4% from 2023 to 2030. This puts Pagaya in a sweet spot to capitalize on the growing demand for AI solutions in the financial sector.
Analysts See Triple-Digit Upside for PGY
Wall Street's sentiment toward PGY is overwhelmingly positive. Out of 8 analysts offering recommendations, 5 are shouting "strong buy" from the rooftops, 1 is giving a more measured "moderate buy," and 2 are playing it cool with a "hold" rating.
The mean target price for PGY stands at $27.12. Based on the stock's Friday close, that suggests a potential upside of 127% - more than double the current price.
Obviously, it's not just KBW that's bullish on Pagaya. Canaccord Genuity analyst Joseph Vafi recently reiterated a "Buy" rating on PGY with a price target of $42, representing an ambitious upside of about 253% from its current levels. Vafi noted that Pagaya's AI-driven platform is "increasingly resonating with bank partners," which could drive significant growth in the coming years.
The Bottom Line on PGY Stock
Pagaya Technologies is making all the right moves to position itself as a major player in the fintech space. With strong fundamentals, strategic partnerships, and a promising growth trajectory, the company is well-poised for future success.
Against this backdrop, the recent "Outperform" rating from KBW and PGY's upcoming inclusion in the Russell 2000 Index only add to the excitement. While there are risks, the potential rewards make PGY a stock worth considering at current levels.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
