Pagaya's Selloff: Credit Fear Overreaction or Fundamental Risk Realignment?

What happened

Pagaya Technologies' stock has experienced a notable selloff, which a Seeking Alpha article attributes to an overreaction to credit fears, not fundamental weaknesses, citing strong Q3 2025 results. The quarter showed $350 million in revenue, a 36% year-over-year increase, and the third consecutive GAAP net income quarter, with adjusted EBITDA margins improving to 30.6%. However, the DeepValue report critically highlights that Pagaya faces high leverage with a net debt to EBITDA ratio of 7.3x and heavy dependence on ABS funding markets, exposing it to credit cyclicality. Despite operational improvements, earnings quality is clouded by significant non-GAAP adjustments and stock-based compensation, indicating underlying volatility. Therefore, the selloff likely reflects rational investor concerns about these structural risks, rather than mere irrational fear, aligning with the report's cautious stance.

Implication

The selloff presents a potential entry point for investors if credit fears are overblown, but Pagaya's high leverage and ABS funding reliance mean any market tightening could cripple growth and profitability. Monitoring key metrics like FRLPC% and ABS issuance volumes is essential to gauge sustainability, as improvements may be fragile amid economic uncertainty. While the stock trades 24% below DCF-based intrinsic value, this upside hinges on stable credit conditions and continued access to capital, which are not guaranteed. Long-term investors must weigh the data-network moat against partner concentration and regulatory risks, making diversification and risk management crucial. Thus, any investment should be cautious, with a focus on exit triggers if funding or credit performance deteriorates.

Thesis delta

The Seeking Alpha article argues the selloff is detached from fundamentals, but this does not shift the DeepValue report's thesis of a high-risk potential buy. It reinforces the dichotomy between short-term operational strength and long-term structural vulnerabilities, emphasizing that investor caution is warranted despite positive quarterly results. No fundamental change in the investment stance is required, but vigilance on risk factors remains paramount.