Pagaya ($PGY) - Stars Are Aligning for this AI-backed Fintech

It's time to take a step back from overvalued AI providers and shift focus towards companies that are now exceeding growth estimates by a wide margin as a result of AI integration. This has been a shift in thinking from where I was a couple years ago when I was investing in pick and shovel companies that would support AI (e.g., bought 40K shares of Navitas 2 years ago at DCA of around $4), as many of these companies are showing extremely high valuations compared to current profit and revenue. Looking at the consumer end of AI, there are some very attractive companies and extremely low and underappreciated valuations. Of all those companies, I'd like to introduce you to one of them that shines the brightest. Let me start off with the expectation. I believe PGY will move from $22 to about $45-60 this year., and it will be well over $100 in the next year or two. This is backed by both it's story and performance metrics. What does Pagaya do? The company provided a second look to rejected loans from banks, using AI backed analysis to determine if the risk was miscalculated, and if so, would approve loans using company cash backing the riskiest tranches of the loans (the "first-loss" tranche), while selling off the more secure tranches to other funds. Keeping skin in the game was a requirement but the riskiest tranche also provided the highest yield. The better the loans did, the more cash became available for future loans, making a situation for exponential growth fueled by high yield interest. \* Red Wedding Massacre Pagaya went public via a SPAC, got all the investors in the same room, and got slaughtered out of the gate. The federal reserve hiked rates which made the higher loans more volatile and the company began seeing some defaults in it's held tranche. A low float paired with volatility and losses incurred on the risky tranche saw the price drop from $300 to $8. The first three quarters of 2024 saw the company losing $50-100M and the sentiment absolutely plummeted. Each quarter got worse and worse. There was also a situation where the CEO of Theorem Technology, a company Pagaya acquired in 2024 to bolster it's strategic capital, sued Pagaya after it offloaded some of it's riskier debt to it's current clients which was not expected. While the market did not like this, it seems to have been a strategic move by Pagaya which may have helped save the company. Since Pagaya's turn around, the lawsuit has been put suspended. \* Fundamental Shift in Funding and AI tuning In late 2024, Pagaya made some changes in how they fund the loans, securing deals with sovereign funds and insurance companies where they committed large amounts of upfront capital to fund loans. Pagaya now had a vehicles to fund and offload the loans immediately on behalf of their clients. This moved them from a First-Loss arrangement with high-risk to a Forward-Flow arrangement with minimal risk. After their disastrous 2024 earnings \[2Q24: -1.04 (est. -.01), 3Q24: -.93 (Est. -.19), 4Q24: -3.2 (est. -.52)\], they posted a surprise beat and their first profitable quarter. And over the next two quarters, they have crushed expectations, growing at about 35%. They've been constantly evolving their AI analysis with impressive results, shown by the amount of partnerships and forward flow agreements they've brought on in just 12 months. They've become a tollbooth now between lenders and borrowers, with the ability to take on as much or little debt as they want, collecting fees on every loan they approve. This essentially makes them a pure, high-margin service backed by AI in a one of the most valuable sectors. \* Forward Expectations This company is starting to take off and the negative narrative is starting to unravel. It has a laughable Price/Sales ratio of \~1.2x while its peers like Upstart and Affirm average around 6. Just based on comparable valuation alone, this would sit at about \~$100. The company is growing at \~%35 YoY, is expected to post another incredible quarter on February 9th with many analyst upgrades. One more profitable quarter and it will make it 4 in a row, something that both catches the interest of large investors looking for consistency and it would also phase out the -$3.2 earnings hit incurred in 4Q24 which has been hiding the last three profitable quarters. They have 8 partners in the pipeline integrating their software, they've increased their offerings providing new verticals for cash flow, and they continue to secure more and more forward-flow funding commitments. I think realistically, this will move back towards its 1yr high of $45 in the near term. But the fact remains that this company is severely undervalued and derisked, giving it great potential to move much higher, especially post earnings. My position: 20,000 shares at $25 150 Feb 16th $26C