I am looking to understand from people who are familiar with loan origination and credit flow about why PGY trades at 1 X sales while UPST trades at 10x sales. The underlying sales and Adjusted earnings are better for PGY but UPST has better growth rates but looks like there is big chasm in terms of investor perceptions on the future prospects. Is this because UPST is a US based compeny vs PGY or there is some fundamental differences in their biz models .
Rajesh
I dont have answers to all your questions. I do know Pagaya is now based in the U.S. however.
Pagaya has been marked down by the market due to lots of management errors and poor communication with investors over the years. They also had significant impairments from their 21-23 loans.
However, that is changing now, as I thought it would, and as I’ve said in my last 2 portfolio reviews. Their recent ER ticked all the right boxes. They paid off a big chunk of the impairments. They are anticipating GAAP profitability this year. They outperformed on all of their metrics. They had a great report. The market liked it and it rose 24.4% yesterday, slightly above APP!
As APP is my number 1 holding, and SMCI my number 2 holding, with PGY also a significant %age, it has been a very good week for me!
Best,
Jonathan
@jonathan1 I’m curious how are you going to be treating PGY moving forward. I’ve been in the same boat as you, waiting for this investment to pay off for a while and I hope that we’ve reached the tipping point.
But if we’re honest, it’s kind of half way between a value stock and a growth stock right now…28% growth is good but I have no other stock growing at that low of a pace. Of course, it has lots of potential catalysts which we both have written about. It’s obviously severely undervalued on most valuation metrics.
So, do you have a certain valuation you’re waiting for before you start to raise your growth expectations? I’ve been thinking about setting a bar here.
I don’t really have an end point in mind - but I would say that at least twice P/S (UPST is 10!) would be a double from here.
Jonathan
Anybody subscribing to Berts service here? He has given a lot of ink to the PGY is it, or isnt it, going to take off soon debate. I wont divulge his thinking other than to say he continues to hold.
Tim.
At this time I do not hold a position in either company, though I have held positions in both companies at different times. It did not work out well. However, I am once again considering taking a position, but I’ve just started looking at them both again.
So much for my history and experience with investing in these companies. I think I can provide a high level description of some of the fundamental differences in their business models.
Let’s begin with the common ground between the two companies. In a nutshell, they both came to understand that the FICO score, based on five criteria is an outdated loan evaluation tool. An AI based evaluation that takes thousands of points into consideration provides a much better determination of the risk associated with providing a loan to a specific individual for a given purpose under certain lending criteria.
Upstart often acts as a direct lender. They originate loans and hold those loans on their balance sheet. This has been the source of significant trouble in the past, rocking their business and severely damaging the stock price. However, I am quite sure that they also act as a loan underwriter for partner banks and credit unions. Upstart lends (or recommends lending) money in relatively few categories, i. e., unsecured personal loans and small dollar loans, auto loans and refinancing. I know they were exploring mortgage loans some time ago. I don’t know whether or not they now lend money with real estate as the underlying security. Possibly other categories as well, I’ve not looked into this recently.
Pagaya, OTOH, is much more like a loan underwriter than Upstart. They provide lending evaluations for partner banks and other financial institutions (I think). In any case, they provide a second review of loan applications rejected by a partner and occasionally suggest that a profitable loan could be placed with that borrower. They receive a commission for this service. The partner institution remains as the customer interface, Pagaya’s role is hidden. This allows the good will to accrue to the partner.
Due to regulations that mandate it, they carry a certain percentage of loans on their own balance sheet. Pagaya routinely bundles secured loans and sells them as an asset backed security (ABS). In so doing, they offload the risk associated with the loans in the bundle to the buyer of the ABS. Additionally, they raise funds with which they place new loans. They address a much broader range of lending categories than Upstart. The bundled ABSs that they sell are well diversified with respect to borrowers and loan categories which serves to dilute the risk associated with each specific loan.
Due to Pagaya’s dual functions, direct lending/lending evaluation and provisioning of ABSs to investors they service a much broader customer base than Upstart.
I owned both Upstart and Pagaya. Upstart on and off since 2021 - bought back last year around May. I bought Pagaya after last quarter, their conf call sounded positive and partly on the belief that it’s very undervalued compared to Upstart.
There was a short report on Pagaya last week. I sold my core position after the report (still hold some calls) and wouldn’t buy back ever again. Before you decide short reports are all bad, I think you should read it. It’s one of the good ones and imo doing the right service short sellers are supposed to do to keep the market healthy.
Read the section on their management, many of these guys don’t seem like the kind you want to invest with - very checkered history. There are also other self dealings - CEOs parents did a reverse takeover of a company that former CTO founded, which was then sold. A year later, there was several issues identified in the company which then collapsed. It’s like reading a horror story of people you don’t want to associate with.
Also focus on the section on Pagaya opportunity fund. Looks like they took money from several investors in Israel (this is not investment in Pagaya but asset management I think). They used this money to buy the lowest tranches (highest risk) in the ABS which allowed other ABS investors to participate in the less riskier tranches. Worried investors in the opportunity fund tried to get their money back but couldn’t.
" Clearly these investments have not gone well. In 2023, the Israeli press reported that the fund received “an extremely high number of requests for withdrawal”, but lacked the cash to meet these requests according to investors. As a result, management suspended immediate and full withdrawals of funds."
“The market has failed to recognize a crucial fact: a significant portion of Pagaya’s ABS securities is not purchased by third-party investors, but by funds managed by Pagaya, who acts as the general partner. This had led to massive losses for the limited partners.”
@This2ShallPass well I must say that report is both illuminating in terms of the details of their business model and pretty concerning. Important context for why the loan impairments were such a big deal for analysts on the earnings calls. And yet the market obviously shrugged off this report.
Lots to think about and I will likely trim it back a good deal this week just to mitigate risk (trying to learn my lesson from SMCI last year).
Brittlerock,
You are correct, UPST originates loans and warehouses them until they convince a partner to take them off their hands - a partner that believes in their algorithms. They clearly and appropriately discuss the risk that they can’t offload the loans and what would happen if these loans default worst case, which isn’t pretty. It also leads to a balance sheet that moves around quite a bit.
Vinnie G
Probably leaving some value outing on the table but I sold out of Pagaya at the beginning of trading hours today and re-invested it in Robinhood where I am more confident of growth and risks. Happy to also have Upstart and SoFi and Toast in Fintech and payments.
Made 10% on my first purchase and 90% on the latter purchases - averaged up 60% over the last few months of holding.
Ant
Did you have a Toast write up? I held them for a while, but things didn’t look to rebound too much after pandemic so I moved on. I think my retirement account still holds them, but I don’t in my play account. If you did a write up I’d love to read it.