The share price of Israeli fintech company Pagaya Technologies (Nasdaq: PGY) shot up again in New York on Friday, still without the company reporting any significant development in its business. The price rose 38%, a day after falling 18%, and by the close the company’s market cap had reached $16.2 billion.
In the past week and a half, Pagaya’s share price has risen all of 820%, with no substantial news from the company. The general view is that the cause of the rise is a short squeeze - speculative trading in the stock that compels short players to cover their positions by buying shares, because of the low amount of floating shares in the company.
Chen Ben Hanania, an equity analyst at Oppenheimer & Co., says however, "In the case of Pagaya’s stock, it’s not certain that we are seeing a classic short squeeze scenario. The small amount of shares on the market, and the high daily volume of trading in them, several times their number, indicate that investors are not finding shares available for borrowing."
There are fewer than one million Pagaya shares available for trading on the stock market. Daily trading volumes are several times higher than this. On Friday, for example, the volume of trading reached 14 million shares, and on Tuesday and Wednesday of last week daily volumes were 58 million and 43 million, which means that shares are being passed from hand to hand.
The exceptionally high volumes could indicate a short squeeze, as mentioned, but could also arise from speculative trading between "machines", or even trading that serves the interests of someone with a position in the stock.
Price does not reflect economic value
For the time being, it is not possible to raise the amount of Pagaya stock on the market, because the shares held by the founders and other parties at interest in the company are locked up, as a condition of the SPAC merger deal whereby Pagaya became a public company on Nasdaq in June.
Friday’s rise in Pagaya’s stock price makes it, for the time being, the second most valuable Israeli company after SolarEdge Technologies (Nasdaq: SEDG), which has a market cap of nearly $20 billion. On Friday, Pagaya overtook veteran, and highly profitable, cybersecurity company Check Point (CHKP), which has a market cap of $15.6 billion.
In 2021, Check Point had revenue of $2.2 billion and a net profit of $816 million, while Pagaya finished that year with revenue of $445 million and a net loss of $134 million. Clearly, then, Pagaya’s current share price does not reflect the company’s economic value, and many on the market are betting on a painful fall. For the time being, though, that is not happening.
Lock-up could end sooner than expected
Pagaya provides solutions based on machine learning and big data that allow financial institutions to more accurately manage credit allocation. The company was founded in 2016 by CEO Gal Krubiner, CRO Yahav Yulzari, and CTO Avital Pardo.
The current share price makes the founders, all still under 40, billionaires on paper. Pardo has shares currently worth more than $4.3 billion while Krubiner and Yulzari each have shares worth $3.2 billion. However, the shares are still locked up and they are unable to sell them, although they sold shares worth $200 million in secondary deals before the listing on Nasdaq.
At the moment, the founders and other parties at interest in the company (Viola Group, venture capital firm Tiger Global, and Clal Insurance) cannot realize any of their holdings because of the lock-up period that applies to them. The meteoric rise in the share price could, however, enable them to do so earlier than expected.
According to a report by Pagaya in April, the lock-up mechanism is as follows: half the shares are locked up for 90 days following completion of the merger with the SPAC, if the average share price in daily trading (volume-weighted average price) is above $12.5 for 20 consecutive sessions out of 30 sessions.
The other half of the shares held by the founders and parties at interest is locked up for six months. If the share price fails to meet the threshold described above, the lock-up for all the shares will be extended to twelve months from the closing.
It should be stressed that the share price in the mechanism is the daily average, not the closing price. Pagaya’s stock is currently traded at over $24 per share, double the target price, and it has surpassed the $12.5 average in the past four sessions. It can be assumed that the volatility will continue. If we reach a situation in which the lock-up is released, the founders and parties at interest will be able to sell shares, which will almost certainly lead to a sharp drop in the share price.
Published by Globes, Israel business news - en.globes.co.il - on August 1, 2022.
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