Why Pagaya Technologies (PGY) is Outperforming the Finance Sector in 2025

In 2025, Pagaya Technologies (PGY) has delivered a year-to-date (YTD) stock return of 137.3%, far outpacing the Finance sector's average gain of 4.92% and the S&P 500's 3% according to financial analysis. This exceptional performance is not a short-term anomaly but a reflection of structural improvements in the company's credit fundamentals, AI-driven risk management, and a resilient business model. As the financial landscape grapples with lingering macroeconomic uncertainties, PGY's strategic evolution positions it as a compelling long-term investment.

Strengthening Credit Fundamentals: A Foundation for Sustainable Growth

Pagaya's outperformance is underpinned by a dramatic improvement in credit fundamentals. Credit-related impairments, which had previously been a drag on earnings, have declined by over $95 million year-over-year, driven by better-performing loan vintages. This turnaround is evident in the company's financial results: for the third quarter of 2025, Pagaya reported $23 million in GAAP net income-a $90 million increase from the prior year-and adjusted EBITDA of $107 million, up 91% year-over-year. These metrics highlight a shift from cyclical volatility to consistent profitability, supported by disciplined underwriting and a diversified funding network.

The company's earnings estimates further reinforce this narrative. According to Zacks Consensus Estimate, the 2025 and 2026 earnings now stand at $3.10 and $3.41 per share, respectively, reflecting 273.5% and 10% year-over-year growth. This optimism is grounded in Pagaya's ability to reduce credit losses while expanding its origination capabilities, a feat achieved through tighter credit filters.

AI-Driven Risk Management: A Competitive Edge

At the heart of Pagaya's success is its AI-driven risk management framework, which has redefined its lending model. By leveraging machine learning algorithms, the company has improved the accuracy of credit decisions, enabling it to identify high-quality loans while minimizing exposure to defaults. This approach has been particularly effective in its Auto and Point-of-Sale verticals, where delinquency rates have stabilized despite broader economic headwinds.

Moreover, Pagaya's AI tools extend beyond underwriting. The company's Direct Marketing Engine and Affiliate Optimizer Engine, for instance, enhance its partners' ability to acquire high-quality borrowers while maintaining credit discipline. This dual focus on technology and data-driven decision-making has allowed Pagaya to act as a "credit funnel," connecting lenders with institutional investors in a way that mitigates risk while scaling efficiently.

Structural Improvements: Debt Refinancing and Funding Network Expansion

Pagaya's structural refinancing efforts in 2025 have further solidified its competitive position. The company successfully issued $500 million in senior unsecured notes, reducing its cost of debt from 11% to 9% and securing ratings from all major credit agencies. This refinancing is projected to generate $12 million in annual interest savings and $40 million in improved cash flow, directly enhancing shareholder value.

Simultaneously, Pagaya expanded its revolving credit facility to $132 million, lowering interest rates by nearly 35% and aligning funding costs with its high-yield bond coupon of 8.875%. These moves have not only strengthened the balance sheet but also diversified the company's capital sources, reducing reliance on short-term securitization markets. With over $8 billion in capital commitments raised year-to-date and 74 unique investors participating in its PAID platform, Pagaya's funding model demonstrates remarkable durability.

Valuation and Long-Term Prospects

Despite its strong performance, Pagaya remains undervalued relative to industry benchmarks. The stock trades at a forward P/E ratio of 7.37 and a forward P/S ratio of 1.47x, significantly below the Software industry average of 4.85x and the peer group average of 3.65x. This discount reflects the market's underappreciation of Pagaya's structural advantages and its ability to sustain growth in a high-interest-rate environment.

Looking ahead, Pagaya's off-balance-sheet business model-where it acts as a technology platform connecting lenders with institutional investors-provides a unique scalability advantage. By avoiding direct loan ownership, the company minimizes credit risk while leveraging its AI-driven infrastructure to expand its network. This model, combined with its recent partnerships (e.g., with Achieve) and product innovations, positions Pagaya to maintain its outperformance in 2026 and beyond.

Conclusion

Pagaya Technologies' 137.3% YTD return in 2025 is a testament to its ability to adapt and innovate in a challenging financial environment. By combining AI-driven risk management with structural refinancing and a disciplined lending approach, the company has transformed its credit fundamentals and earnings trajectory. As the Finance sector struggles with macroeconomic headwinds, Pagaya's forward-looking strategies and undervalued metrics make it a standout long-term investment.