Key points:
- Pagaya Tech is down 55% premarket
- The volatility of the stock price is really a technical factor
- The free float is tiny, current trade is several times it – that means volatility
Pagaya Technologies (NASDAQ: PGY) has a lot going for it, in the sense that it's the application of new and better technology to a very large market. That obviously provides a large potential upside – grow fast in a large market and what's wrong with that? But that's to look at the underlying business only, which isn't quite the point of stock market investing. We also need to look at what is the current price being applied to that growth opportunity? Is that price higher or lower than we think it should be?
At which point Pagaya begins to look a little less exciting as a stock to invest in. Yes, OK, so fast growth – we're seeing growth rates of 60% plus y on y in revenues for example – but this does still mean that the starting price matters. 21 times, as it has been, forward revenues, is a lot. Note that's forward revenues, not profits.
As to what Pagaya Tech does that's the application of artificial intelligence models to credit decisions and lending. It's an obvious area for expert systems to invade and there are others doing much the same thing. There's little to no problem with the base story that is – the technology and the marketplace are indeed suited to each other. There's no credit risk as Paygaya doesn't retain loans based upon its work. Why wouldn't we be interested therefore?
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At which point there are two things to note. One is that this is a recent SPAC merger and the price has been very rich, very rich indeed in these past few months. When the price, soon after the merger, reached near $30 that was valuing Pagaya at near $25 billion – which is a great deal for revenues of $400 million. But more than that this is a very, very, thin market. So any price movements are exaggerated to a vast extent.
By one count at least there are 439 million pieces of stock in issue. But the free float at issue was is only 340k shares. Yesterday's trade was near 900k shares, so we're seeing a turnover of twice the free float in just the one day. Another count has 1.39 million pieces of stock traded just premarket this morning. That's 3 and more times the free float in just this one morning. This is, given the size of the float, simply going to be a vastly volatile stock at PGY.
This is the real point to take away from the Pagaya stock price gyrations. Yes, of course, we can think about AI as applied to lending decision. The interesting idea of being a fee taker rather than loan originator. But the real driver of the gyrations is the incredibly thin float – the paucity of stock actually on the market to trade. This does of course make PGY a very fun stock to trade – but it's always going to be extreme movements driven by sentiment. Simply because there are so few pieces of stock out there to trade.