Over the past few days, fintech company Pagaya Technologies (Nasdaq: PGY) briefly became Israel's most valuable company with a market cap of $17.6 billion - higher than veteran Israeli tech companies like SolarEdge Technologies (Nasdaq: SEDG) ($16.4 bilion),Check Point Software Technologies Ltd. (Nasdaq: CHKP) ($14.8 billion) and NICE-Systems Ltd. (Nasdaq: NICE; TASE:NICE) ($14.1 billion). But the share price has been falling and is currently down 11.26%, at $23.87, giving it a market cap of $15.7 billion.
Pagaya's share has performed exceptionally over the past two weeks, with the price rising from $2.70 to $26.90 yesterday, when it began falling. A lot of investors on Wall Street are talking about the company. But who is Pagaya, and how has it reached its current valuation, and for how long, according to market estimates, can the rollercoaster ride continue?
Pagaya is a fintech company, which provides solutions based on machine learning and big data that allows financial institutions to more accurately manage their credit allocation procedures. The company was founded in 2016 by CEO Gal Krubiner, CRO Yahav Yulzari, and CTO Avital Pardo. Pagaya has 800 employees and in 2021 reported revenue of $475 million, a net loss of $134 million, and positive EBITDA of $45.9 million.
How did the company list on Nasdaq?
Last year hundreds of companies listed on Wall Street via mergers with special purpose acquisition companies (SPAC) - blank check companies with no activities that raise money and must then merge with an existing company within a pre-defined period of time. In September 2021, Pagaya announced that it had agreed a SPAC merger with EJF Acquisition Corp. at a company valuation of $8.5 billion, even though its most recent financing round in 2020 had been completed at a company valuation of just $500 million.
Despite the sharp falls on the markets this year, which mainly hit tech companies, the merger was completed in late June at the original valuation, even though one of the banks supporting the deal - Barclays, withdrew at the last moment, in practice washing its hands of the merger. Moreover, almost all the investors in EJF preferred to take their money back, rather than participate in the deal, in which Pagaya raised $350 million from PIPE (private investment public equity) investors.
What happened to the share price?
Pagaya's share price was expected to fall fast because the valuation had not been cut even though the market had plunged since the SPAC merger was agreed last September. When CEO Gal Krubiner was asked at the last moment before listing what he thought, he said, "Unforntunately or luckily, we do not control or decide about share prices. It is important to understand that the question is about the long term, and what will be our performance in five years, for example."
And indeed the share price plunged and within the first five days of trading, Pagaya's share price was down 70% from the merger valuation to $2.53. But then towards the end of July, the share began to consistently rise, in especially high trading turnover, with the share price eventually rising tenfold.
Is this exceptional?
The sharp rise in Pagaya's share price recalls the meme shares that starred on Wall Street in early 2021, including GameStop and AMC, when investors and traders exchanged tips on forums like WallStreetBets on Reddit, which included millions of followers.
Herd behavior led to many people buying the same stock and inflating the price meteorically within a short period and hurting hedge funds that had bet against the shares by selling short, forcing them to buy back shares on which they had closed short positions, at very high prices (short squeeze).
How does the market explain Pagaya's rise?
The widespread assessment is that Pagaya's share price has been an extreme example of a short squeeze. The volatility probably began with a long position taken by investors who took advantage of the low float in the share price and in practice this caused serious problems for short traders, by pushing up Pagaya's share price.
Short-selling is a way of making profits on paper when a share price is falling. The trader borrows shares from the owner and sells it on the market, and subsequently buys it back, if and when the price is lower, in order to give back the shares to their owner. If the share price does go down then the short seller profits. The relatively high trading volumes recently also suggest some automatic speculative buying.
Who wins and who loses from this situation?
Meanwhile most of the people profiting from the situation are those who invested in Pagya when the price fell and have seen hundreds of percentage points in returns. Presumably most of the investors have small stakes because nobody has reported becoming a party at interest in the company.
Pagaya's three founders are the main beneficiaries at this stage only 'on paper.' Pardo has shares worth $4 billion, while Krubiner and Yulzari have shares worth $2.6 billion each. But only on paper because these shares are still blocked.
But the blocking period could shrink considerably following the rise in the share price. The period after listing in which it is not permitted to sell shares ranges from 90 days to 12 months and depends on whether Pagaya's share can trade for more than $12.5 for 20 consecutive days. At the moment it has only completed seven trading days above that level. Regardless of what happens, the three founders won't be paupers, having sold shares worth tens of millions of dollars in private secondary deals, before the SPAC merger.
Other major shareholders include Viola with shares currently worth $2.6 billion, Tiger Global with shares worth $1.9 billion, Oak with shares worth $1.8 billion and Clal Insurance with shares worth $1.2 billion. The losers at the moment are the investors who gambled on the share falling and took up short positions.
Is anything here illegal?
On the face of it, there is no problems of legality. It is more a situation of a market failure that can allow such a situation to develop. It is probably not a case of share price manipulation or trading with insider information but simply taking advantage of an unusual set of circumstances on the market.
Where will it all end
On the assumption that the estimations are correct and that this is a short squeeze, then the situation is likely to end with sharp falls, leaving Pagaya's share price at a level that reflected the business situation of the company when it listed in June. That will happen when the block on the shares is removed. On the assumption that some of the investors today will not be able to fully benefit from the rises, they will choose to sell some of their shares. At the current level of the share price, this could happen in several weeks.
Published by Globes, Israel business news - en.globes.co.il - on August 4 2022.
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