Why Pagaya Stock Dropped 20% in September

Shares of Pagaya Technologies (NASDAQ:PGY) stock fell 20% in September, according to data provided by S&P Global Market Intelligence. Investors are worried about how high interest rates and bond market volatility will impact the credit evaluation company.

The AI way to lend money

Pagaya operates a credit platform driven by artificial intelligence (AI) and machine learning. It teams up with client lenders, who have Pagaya's platform integrated into their systems, to assess borrower risk quickly and more accurately than traditional models. Client partners can then approve more loans without adding risk.

Image source: Getty Images.

The platform acts as a middleman, approving these loans and then selling them as asset-backed securities (ABS) to partnering funders. The software-based model is agile and low-cost, and Pagaya takes a fee from each loan. Each incremental loan from the same provider comes without marketing and acquisition costs, and the company's growth strategy involves adding new client partners as well as driving higher engagement with existing partners.

Pagaya already works with a stellar client list of 35 partners that includes Visa (NYSE:V), U.S. Bank (NYSE:USB), and SoFi Technologies (NASDAQ:SOFI). It has a long pipeline of new customers that are joining the platform, and its goal is to add two to four large clients annually, focusing on large banks and auto dealers.

Pagay isn't the only name in this space, but it has an advantage in its funding model. It has relationships with 170 institutional investors and has the funding before any loans are issued. It's the top issuer of personal ABS loans in the U.S., with a triple-A rating across categories.

Can it keep up high growth?

Pagaya has been reporting consistent growth and increasing profits. In the second quarter, total revenue increased 19% year over year to $387 million, and net income increased 172% to $45 million. Volume increased 33%, so there's been no shortage of new loans to approve, so far, despite the high-interest rate environment. Growth was driven by auto loans.

However, it's highly exposed to the credit industry, which has been troubled by higher borrowing costs. One area where the pressure is showing is in fee revenue less production costs (FRLPC) margin, an industry profitability metric. FRLPC increased 16% over last year in the quarter, but the margin decreased by 0.61 percentage points to 4.2%, based in part on the increased cost of capital.

Pagaya stock isn't for the risk-averse investor, but for those with a high appetite for risk, Pagaya stock looks like a bargain today. At the lower price, it trades at under 14 times trailing 12-month earnings, which is cheap for a high-growth AI stock.

Jennifer Saibil has positions in SoFi Technologies. 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.