Why Pagaya Stock Plummeted 43% in March

The business is doing great, but management is making some eyebrow-raising decisions.

Shares of Pagaya Technologies (PGY 6.12%) plunged 43% in March according to data provided by S&P Global Market Intelligence. It announced a new stock offering just after a 12-for-1 reverse stock split at a lower price, which is a setup for a price drop.

These are surprising new updates

Pagaya operates an artificial intelligence (AI) powered credit platform that works with lenders to identify good borrowers without increasing risk. It has several products, including ones that target personal loans, credit cards, automotive loans, and more. It has been adding lending partners at a rapid pace, ending 2023 with 29 partner clients, including high-profile names like Visa and Ally Bank. It recently inked a deal with U.S. Bank, the fifth-largest U.S. bank by assets. It has 109 funding partners and is the No. 1 issuer of asset-backed securities in the U.S.

Pagaya has been demonstrating robust growth. Network volume increased 33% year over year to $2.3 billion in the 2023 fourth quarter, and revenue was up 13%. Net loss improved by $20 million to $14 million, and Wall Street is expecting positive earnings per share in the 2024 first quarter.

Pagaya went public in 2022 through a special purpose acquisition company (SPAC) deal. It soared immediately but then sank, and it was trading at around $1 until its reverse stock split last month.

In January, management announced two specific strategic actions it would undertake to improve the stock’s “marketability” and enhance long-term shareholder value. These include moving the company’s headquarters from Tel Aviv to New York, and the reverse stock split. Stocks trading for $1 won’t be considered for certain indexes or institutional investing accounts.

Right after that, it issued a new stock issue with a share price of $12.70, which was below the stock price at that time, setting it up for a fall.

What does this mean for Pagaya’s future?

Securities is Pagaya’s business, so it understands the implications of these actions better than other companies might, and it still decided to go ahead with this. Investors may not have the whole picture, which makes you wonder what else is going on. That also adds risk.

At the same time, Pagaya stock looks like an incredible bargain right now. If it becomes cash-flow-positive and profitable on a generally accepted accounting principles (GAAP) basis, its stock could really take off this year. It’s incredibly cheap, trading at a price-to-sales ratio of 0.8 and a forward price-to-earnings ratio of less than 6. That’s the kind of undervalued growth stock investors dream about.

If you have a high appetite for risk, you might want to take a small position in Pagaya right now, but most investors should keep it on their watch list.

Ally is an advertising partner of The Ascent, a Motley Fool company. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends U.S. Bancorp and Visa. The Motley Fool recommends Pagaya Technologies. The Motley Fool has a disclosure policy.

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