Pagaya: Unwarranted Sell Off

seekingalpha09-27

Pagaya Technologies originally fell over 30% after announcing a debt refinancing plan to save $30 million in annual interest expenses, improving cash flow.The market's reaction was irrational, likely ...

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(NASDAQ:PGY) fell hard after a debt offering. The fintech made the move to immediately improve financials, yet the market irrationally sold off the stock. My investment thesis remains ultra-bullish on the fintech after this deal. Source: Finviz Small Transaction, Big Impact Pagaya announced a series of transactions after the close on September 25 leading to the stock collapsing over 30% at one point during the following trading day. In summary, the fintech announced a plan to save $30 million in annual interest expenses, leading to the business being cash flow positive going forward. Source: Pagaya Tech. 8-K The negativity on the deal is odd considering the very positive move of refinancing $270 million of debt with mid-to-high teens interest costs. Pagaya will issue $125 million in exchangeable notes, a $100 million term loan, and sell up to $100 million in securities to optimize the balance sheet. The market likely doesn't like the $125+ million in exchangeable senior notes due to the future possibility of diluting shareholders via exchanging the notes for shares. In reality, the dip is likely due to exchangeable note holders shorting the stock to hedge the position. Hedge fund managers tend to short the stock to net out the effects of the stock price movement. Big Progress The negativity is further confounding, with Pagaya reporting Q2'24 adjusted EBITDA of $50 million. Even if one adds back the nearly $22 million in interest expenses, the adjusted profit was still $28 million. Source: Pagaya Tech. Q2'24 earnings release In the last quarter, Pagaya already produced operating income while including $18 million in share-based compensation plus other one-time charges. The only major issue is the drag from the high interest expenses leading to the high costs for the secured borrowings, eliminating the positive cash flows from operations. The business is firing on all cylinders, with the FRLPC (fee revenues less production costs) metric hitting a record high of 4.2%. Pagaya produced a record FRLPC of $97 million in the last quarter. Pagaya recently announced a $1 billion forward flow agreement for Castlelake to buy consumer loans from the Pagaya network. On top of this efficient capital, the company has added OneMain Financial to the network and is in the process of onboarding another top 5 banks to the network. The AI financial company forecasted Q3 adjusted EBITDA of $50 to $60 million, with total revenue reaching upwards of $260 million. When combined with the $25 million reduction in operating expenses, the fintech has cut expenses by $55 million annually, which should easily turn the company into a positive cash flow machine. The stock has seen the market valuation slump to only $700 million, while the company targets up to $210 million adjusted EBITDA for the year. As discussed above, the adjusted EBITDA isn't perfect due to the exclusion of interest expenses and even taxes, but the number will have more validity going forward with the reduced interest expenses and increased GAAP income. Either way, Pagaya trades at 3.5x adjusted EBITDA targets for the current year. The company appears on pace for strong growth into 2025 with the addition of new big partners. Takeaway The key investor takeaway is that investors don't seem to understand the transaction executed by Pagaya Tech. The stock did rebound as the trading day ended, but the large negativity was unwarranted.  Investors should use the weakness to load up Pagaya with $9 providing strong support and the stock trading at an incredible valuation. As the company reports improving cash flow results come Q4 with the reduced interest expenses, the stock should see a higher bid.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2470084116"}