Pagaya's Credit Trends Are Improving: Here's What it Means

After a stressful period seen during the prior tightening cycle, Pagaya Technologies Ltd.’s PGY credit quality has shown signs of stabilization and improvement throughout 2025. Driven by both portfolio seasoning and structural changes in funding and underwriting, the company’s credit-related losses and impairments have improved drastically from the 2024 reported levels.

In the nine months ended Sept. 30, 2025, credit-related impairment losses on investments in loans and securities declined by more than $95 million on a year-over-year basis, primarily stemming from changes in fair value assumptions and lower impairment recognition as market conditions improved.

Lower impairments reflect better-performing loan vintages, more stable delinquency and charge-off trends, and improved accuracy of Pagaya’s artificial intelligence (AI)-driven underwriting models. In other words, it suggests that recent cohorts are seasoning better than earlier vintages, validating management’s tighter credit filters and risk calibration implemented after the 2022-2023 credit stress period.

As credit-related losses decline, it means that PGY’s earnings volatility has reduced, improving the company’s profitability. Because PGY temporarily holds loans and securities on its balance sheet before distributing them to institutional investors, fewer impairments mean less mark-to-market pressure and stronger adjusted EBITDA conversion. This is evident from the company’s robust 2025 results. This year, PGY hit an inflection point with improving fundamentals and profitability. Despite macroeconomic headwinds and regulatory risks, the company posted three consecutive quarters of positive GAAP net income, a dramatic turnaround from substantial losses in the previous years.  

However, while the company’s credit risks are moving into a more manageable phase, these are not gone completely. PGY’s credit quality improvements need to be viewed alongside elevated leverage and reliance on capital markets, which remain important risk considerations. While asset performance has improved, the company continues to carry higher debt levels, making sustained credit discipline essential.

A Look Into the Business Model of PGY’s Peers

Like PGY, Upstart Holdings, Inc. UPST is an AI-based lending platform that aspires to become capital-light but often holds loans on its balance sheet temporarily. Its core business model involves finding financing for loans after its network of bank and institutional partners originates them.

Upstart partner banks can finance the loan by keeping it on their balance sheet. The bank can sell the whole loan on Upstart’s platform or use forward flow agreements from institutions that commit to buying a specific volume or type of loan originated on the Upstart platform in the future.

Upstart also uses securitization, wherein pools of loans are bundled together and sold as ABS to institutional investors. However, the firm frequently reverts to a balance-sheet-heavy model, especially in tight liquidity markets, making it more volatile and exposed to macro cycles.

Another close competitor of PGY is LendingTree TREE. But unlike PGY, LendingTree is a marketplace platform, not a lender. It matches consumers with financial product providers like mortgages, personal loans, credit cards and insurance.

LendingTree does not underwrite, originate or hold loans. Hence, its balance sheet is not credit-heavy. TREE’s balance sheet is detached from revenue generation. The company is primarily structured to support a fee-based digital marketplace, not balance sheet lending.

PGY’s Price Performance, Valuation & Estimate Analysis

Investors have been bullish on PGY stock. In the past year, the stock has soared 126.2% against the industry’s 4.9% decline.

Pagaya stock is currently trading at a 12-month forward price-to-sales (P/S) of 1.11X, which is below the industry average of 3.36X over the last three years.

Over the past 60 days, the Zacks Consensus Estimate for PGY’s 2025 and 2026 earnings has moved higher to $3.10 and $3.41, respectively. The consensus estimate indicates 273.5% and 10% year-over-year growth for 2025 and 2026, respectively.

Currently, Pagaya carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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