Track market-moving stories before they get noisy

da-kuk/E+ via Getty Images

Software’s Second Act: AI Shifts From Threat to Catalyst In my opinion, software stocks are resurfacing after a difficult 2026 because investors may have become too pessimistic about AI’s disruptive impact. I have seen concerns that generative AI could undermine traditional SaaS models, reduce per-seat pricing, and make customized software dramatically cheaper to build. Those fears drove significant multiple compression, particularly among small-cap software stocks.

More recently, I have seen encouraging evidence that AI may be an accelerant rather than an existential threat. I was very impressed with the earnings results from Snowflake (SNOW) and the possibility that the positive trend will impact other software stocks. Snowflake reported product revenue growth of 37% YoY, while remaining performance obligations increased 30%. Management also raised its full-year outlook and indicated that AI products contributed meaningfully to its recent growth acceleration. ServiceNow (NOW) has similarly reported strong adoption of AI-enabled products.

In my view, this creates an attractive setup for smaller software companies. If earnings continue to validate AI monetization, the AI trade could broaden from companies building the infrastructure to software companies monetizing it.

Small-Cap Tech Stocks Quietly Outperform Big Tech Despite AI concentration concerns and shifting interest rate expectations, the stock market has remained resilient as investor confidence improves. In the latest AAII Sentiment Survey, bulls retook the lead, with expectations stock prices will rise in the next six months up 6.8 percentage points. According to its August Asset Allocation Survey, equities reached 71.1% of investor portfolios, the highest level since late last year.

Bullish Investor Sentiment Regains The Upper Hand (Week Ending 9/2/2026)

Bloomberg

Tech stocks in particular have been able to endure volatility in the past month to post positive returns, lifted by blowout earnings from software giants like Salesforce (CRM) and Palantir (PLTR) and rising sector earnings expectations.

However, investors suffering from AI mega-cap exhaustion could consider select small-cap tech stocks whose earnings are not directly dependent on the hyperscaler capex cycle. In addition, these same stocks offer growth potential and stand to benefit from AI and tech-driven secular demand trends.

Although momentum has recently slowed, small-cap tech stocks have outperformed larger peers in the past year, and are trading at more attractive valuations. After gaining more than 60% in the past twelve months, Invesco’s small-cap technology ETF (PSCT) is trading at 18.3x forward earnings, a 29% discount to the S&P 500 Technology Sector (XLK), which has a forward P/E of 25.9x.

Seeking Alpha

Although small caps can offer significant upside potential, investors should assess their risk tolerance. Due to high volatility and risk, small caps are not for everyone. When any investment research firm issues a small-cap recommendation, for example, the stock can surge quickly due to low liquidity. This makes it even more crucial to ensure small-cap tech stocks have strong fundamentals, and Seeking Alpha’s quantitative tools can help investors achieve this objective.

How I Chose Top Small-Cap Tech Stocks Using Seeking Alpha’s Stock Screener, I filtered for small-cap tech stocks with Strong Buy Quant Ratings and solid Growth and Revision Factor Grades. I then narrowed the list by filtering for stocks with forward EPS growth rates above 30%. My small-cap tech basket includes two AI software names and a cloud communications company, showcasing accelerating momentum and bullish revisions, while trading at attractive earnings multiples. Moreover, their underlying businesses have little direct dependence on the hyperscaler capex cycle that has fueled the AI infrastructure boom.

1. Sprout Social, Inc. (SPT) Market Capitalization: $688.93M

Quant Rating: Strong Buy

Sector: Information Technology

Industry: Application Software

Quant Sector Ranking (as of 9/4/2026): 31 out of 530

Quant Industry Ranking (as of 9/4/2026): 5 out of 166

A provider of social media management software, Sprout Social’s revenue has continued to climb as the company expands the capabilities of its agentic AI offerings and business intelligence solutions. Sprout’s revenue grew by a CAGR of 25% over the past five years, and is projected to reach $494.61M in FY 2026. Exceptional price performance and earnings revisions helped drive the stock’s quant rating into Strong Buy territory in August.

Seeking Alpha

Broadening adoption among higher-value customers and increased renewal rates helped lift Sprout’s Q2 2026 revenue by 11% YoY. The number of customers generating at least $50K in ARR grew 16% YoY to 2,127, while customers with ARR above $30K now account for 60.1% of total subscription revenue. Total remaining performance obligations (RPO) surged 16% YoY, and multi-year deals now represent about half of Sprout’s contract mix.

Sprout Social Investor Presentation

Sprout raised its Q4 exit operating margin from 15% to 17%, citing a headcount reduction that is expected to yield $50M in annualized cost savings. The results contributed to an improving outlook, backed by 9 upward earnings revisions to no downward revisions in the last 90 days. Forward EPS growth of 45.49% underpins a solid factor grade, alongside surging operating cash flow.

Seeking Alpha

Trading at only 10x earnings vs. the sector’s 22x, Sprout continues to look attractively priced, in my opinion, even with the recent momentum, supporting an A+ Valuation Grade. Meanwhile, forward PEG - a crucial valuation metric that combines P/E and growth - sits at a whopping 71% discount to the sector. Long-term earnings visibility and an attractive valuation make Sprout a strong AI-fueled small cap to consider.

2. Pagaya Technologies Ltd. (PGY) Market Capitalization: $1.91B

Quant Rating: Strong Buy

Sector: Information Technology

Industry: Application Software

Quant Sector Ranking (as of 9/4/2026): 16 out of 530

Quant Industry Ranking (as of 9/4/2026): 1 out of 166

The top quant-rated Application Software stock, Pagaya offers AI-powered products to help lenders and institutional partners make better loan decisions. PGY soared after a huge Q2 earnings beat, and is now up more than 40% in the past three months for an outstanding Momentum Grade.

As the chart below illustrates, the stock’s accelerating price performance and bullish EPS revisions led to a dramatic turnaround in its Quant Rating over the past six months.

Seeking Alpha

The company achieved record network volume of $3.5B in Q2 2026, up 33% YoY. The network expansion helped drive revenue up by 19% to $387M, while adjusted EBITDA jumped 43%, demonstrating strong operating leverage as the business scales.

Pagaya Investor Presentation

Based on record EPS and strong visibility on the remainder of 2026, PGY raised full-year net income guidance by 25%. Anchored in a forward EPS growth rate of 70.94%, PGY showcases an A+ Growth Grade. PGY’s long-term EPS growth rate (3-5Y CAGR) of 139% is especially impressive when compared to the sector median of 19%.

The long-term EPS growth rate is a key element in the stock’s attractive valuation framework, with forward PEG at a 96% discount to the sector. PGY is also trading at a significant sector discount based on a forward P/E ratio of 6x, in addition to attractive EV/EBITDA, price/sales, and price/cash flow multiples.

Seeking Alpha

While I strongly believe PGY offers solid potential upside, investors should also weigh its elevated risk profile. PGY’s 24M beta of 2.52 indicates the stock has been substantially more volatile than the broader market. PGY also carries a short interest of 15.87%. However, when you consider the AI fintech’s strong fundamentals, exceptional growth, and attractive valuation, the reward could outweigh the risk.

3. Ooma, Inc. (OOMA) Market Capitalization: $642.36M

Quant Rating: Strong Buy

Sector: Information Technology

Industry: Application Software

Quant Sector Ranking (as of 9/4/2026): 21 out of 530

Quant Industry Ranking (as of 9/4/2026): 3 out of 166

A provider of cloud-based communication technologies, including telephony, messaging, and video solutions, OOMA has crushed the Russell 2000 in the past year, driving an A+ Momentum Grade. The company is targeting a fast-growing Unified Communications as a Service (UCaaS) and equipment market, which OOMA projects could reach $34.4B by 2029.

OOMA vs. Russell 2000 (IWM): 1Y Price Return

Seeking Alpha

Rapid growth in core business subscription and services drove Q2 FY27 revenue up by 25% YoY to $83.2 million, while EBITDA jumped by 74%. OOMA management said it expects profitable growth to continue as it expands AirDial, its analog phone line replacement solution, and integrates the FluentStream and Phone.com acquisitions. The Q2 surge in EBITDA has contributed to a solid Growth Grade, underpinned by a forward EPS growth rate of 32.02%.

Ooma Investor Presentation

Showcasing strong earnings visibility over the next three years, OOMA’s EPS and revenue outlook have increasingly improved. OOMA has seen a string of bullish EPS revisions from sell-side analysts in the past three months for a top-notch factor grade.

Seeking Alpha

Despite incredible price performance, the stock’s forward PEG represents a 41% discount to the sector, although elevated GAAP P/E metrics have weighed on the valuation grade. OOMA wraps up my small-cap tech picks, a basket of stocks showcasing strong forward earnings growth, solid EPS revisions, and accelerating momentum.

Seeking Alpha

Beyond Mega Tech: Top Small Caps With Big Earnings Growth Despite volatility fueled by concerns over an AI bubble, and shifting interest rate expectations, the market has proven resilient amid improving investor sentiment. Tech stocks have remained steady, driven by huge earnings beats by leading software companies and growing EPS targets. However, high concentration around large AI stocks has remained a top risk among fund managers, and investors may be seeking growth outside mega caps. Select small-cap tech stocks can offer similar earnings growth upside through businesses not directly tied to the hyperscaler capex cycle. In this article, I recommended three Strong Buy small-cap tech stocks offering exposure to AI and communications technology tailwinds. The three stocks showcase robust forward earnings growth, solid momentum, and bullish earnings revisions.

We have many stocks with strong buy recommendations, and you can filter them using Stock Screens to suit your specific investment objectives. Alpha Picks might be ideal if you're interested in two monthly stock picks of the top "strong buy" Quant stocks. Check out our new Alpha Picks app in the Apple App Store!

If you're looking for more frequent investment ideas, consider the PRO Quant Portfolio. It's a weekly rebalanced selection of our Top 30 Quant Strong Buy stocks, spanning multiple regions and market caps.

If you're looking for a data-driven income strategy, explore our new Quant Growth & Income Portfolio—a systematic model built to outperform dividend ETFs by focusing on yield, growth, and safety. Seeking Alpha's Quant ratings and investment research tools help to ensure you are furnished with the best resources to make informed investment decisions while taking the emotion out of investing. Happy investing!

100.87K Followers

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given that any particular security, portfolio, transaction or investment strategy is suitable for any specific person. The author is not advising you personally concerning the nature, potential, value or suitability of any particular security or other matter. You alone are solely responsible for determining whether any investment, security or strategy, or any product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. Steven Cress is the Head of Quantitative Strategy at Seeking Alpha. Any views or opinions expressed herein may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank.

Key Takeaways Pagaya's 1H26 network volume rose 22% y/y to a record $6.16B, lifting total revenues 14.4%.Auto volumes surged about 140% in Q2, supported by nearly 30,000 dealerships and better decisioning tools.Pagaya expects 2026 network volume of $12.5-$13.25B, signaling continued 2H26 momentum. Pagaya Technologies Ltd.’s (PGY - Free Report) network volume, a key driver of its top line, has maintained strong momentum in the first half of 2026. Supported by strength in its Auto and Personal Loan businesses, along with a focus on prudent underwriting, PGY’s network volume increased 22% year over year to a record $6.16 billion in the first six months of this year. Fee revenue less production costs (FRLPC) rose 10.9% to $268.4 million while total revenues and other income increased 14.4% to $705 million, underscoring the positive impact of higher transaction volumes on Pagaya’s revenue base.

Auto has become a key growth driver for Pagaya. In the second quarter of this year, Auto volumes surged about 140% year over year, reaching a $4.8-billion annualized run rate. The company’s connections with nearly 30,000 dealerships, along with better pricing and decisioning tools, are helping lending partners make more competitive offers and improve conversion rates. Higher conversions, in turn, encourage dealers to send more applications through Pagaya’s network, supporting further volume growth.

Beyond Auto, Pagaya’s product-led strategy is broadening the sources of network volume. Its Affiliate Optimizer Engine generated more than $1 billion in second-quarter volume, while Direct Marketing Engine programs are expected to reach $500 million by the year-end. The company is also expanding in point-of-sale (POS) financing and adding new lending partners, which should further broaden its volume base.

Strong access to capital markets is another positive. Pagaya raised a record $3.7 billion through six asset-backed securities (ABS) transactions in the second quarter, while its institutional investor base grew to 174 investors. This funding support, combined with disciplined underwriting and stable credit performance, should help the company handle higher transaction volumes without materially relaxing credit standards.

Looking ahead, FRLPC growth may remain somewhat tempered in the near term by the mix of newer partners and products. Nonetheless, continued expansion in Auto, a healthy partner onboarding pipeline and strong funding availability should keep network volume on an upward trajectory and support top-line growth. Pagaya expects third-quarter 2026 network volume of $3.43-$3.63 billion and full-year volume of $12.5-$13.25 billion, pointing to continued momentum in the second half. Third-quarter and full-year total revenues and other income are projected at $370-$390 million and $1.43-$1.53 billion, respectively.

Comparing PGY’s Business Model With PeersLike PGY, Upstart Holdings, Inc. (UPST - Free Report) 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 - Free Report) . 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 AnalysisInvestors have been bullish on the PGY stock, which has appreciated 70.9% in the past six months against the industry’s 0.5% decline.

Image Source: Zacks Investment Research

Pagaya stock is currently trading at a 12-month forward price-to-sales (P/S) of 1.05X, which is below the industry average of 2.58X over the last three years.

Image Source: Zacks Investment Research

Over the past 30 days, the Zacks Consensus Estimate for PGY’s 2026 and 2027 earnings has moved higher to $3.72 and $4.13, respectively. The consensus estimates indicate 12.4% and 11% year-over-year growth for 2026 and 2027, respectively.

Image Source: Zacks Investment Research

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

Key Takeaways Pagaya gained 10.4% in a week after record revenues, stronger earnings and improving operating trends.Pagaya raised $3.7 billion across six ABS transactions and added 11 investors to its funding network.Higher funding costs, investment losses and partner concentration could limit further gains. Pagaya Technologies Ltd. (PGY - Free Report) shares gained 10.4% in the past week, putting the focus on whether the rebound can extend. The move comes after stronger second-quarter 2026 results and improving operating trends, but a one-week gain alone does not establish a specific catalyst.

The shares have also gained 18.3% in the past four weeks and 59.6% in the past 12 weeks. The broader advance raises a key question: Can improving profitability, deeper funding and partner momentum remain durable enough to support further gains?

3-Month Price Performance
Image Source: Zacks Investment Research

PGY’s Weekly Gain Raises the Sustainability QuestionPGY’s recent price performance is notable because it has occurred alongside firmer business trends. Still, the 10.4% one-week increase should be viewed as part of a larger rebound rather than proof that a particular event will drive the stock higher.

The key test is whether operating progress continues to support earnings. The investment case points to stronger profitability, partner momentum and improving funding depth as supports, while flagging macro, credit and concentration risks.

Pagaya’s Earnings Growth Supports the RallyPagaya reported record second-quarter revenue and other income of $387 million, up 19% year over year, while GAAP net income reached $45.3 million. Adjusted earnings per share came in at $1.07, above the Zacks Consensus Estimate of 71 cents.

The beat was not isolated. PGY topped earnings expectations in each of the trailing four quarters, with an average positive surprise of 43.5%.

Earnings Surprise History
Image Source: Zacks Investment Research

Analysts seem optimistic regarding PGY’s earnings growth prospects. The Zacks Consensus Estimate for the company’s 2026 and 2027 earnings increased by 15.2% and 11%, respectively over the past 30 days.

Estimate Revision Trend
Image Source: Zacks Investment Research

PGY’s Funding Depth Could Extend the UpsideFunding remains an important part of the sustainability argument. Pagaya raised a record $3.7 billion across six ABS transactions in the second quarter and added 11 investors, bringing its funding network to 174 investors.

The funding mix is also becoming more flexible, with 40% of funding coming through non-prefunded ABS products, alongside forward-flow and revolving structures. Amongst PGY’s key peers, Affirm Holdings, Inc. (AFRM - Free Report) uses technology, proprietary underwriting and third-party capital to support its pay-over-time platform, while Enova International, Inc. (ENVA - Free Report) operates an online lending platform powered by analytics and machine learning. Both AFRM and ENVA provide context for technology-driven consumer finance.

Pagaya’s Risks Could Limit Further GainsHigher benchmark rates remain a key risk because they can raise funding costs and pressure securitization economics. Pagaya’s FRLPC as a percentage of network volume fell 61 basis points year over year to 4.2% in the second quarter, partly because of tighter ABS pricing tied to higher cost of capital.

Investment volatility and concentration also warrant attention. Pagaya recorded an $80.3 million year-to-date loss on investments in the first half of 2026, while reliance on a limited number of partners creates network volume and revenue concentration risk. If funding costs remain elevated or partner execution weakens, revenue per unit of network volume could face pressure.

PGY’s Strong Rank Meets Mixed Style SignalsThe sustainability case remains constructive but not one-sided. Strong earnings growth, funding depth and partner expansion provide support, while FRLPC pressure and credit, investment and concentration risks could temper the upside.

PGY currently carries a Zacks Rank #1 (Strong Buy), with a Value Score of B, Growth Score of A, Momentum Score of B and VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Rank is designed to help assess expected stock performance over the next one to three months, while the Style Scores complement it by measuring value, growth and momentum characteristics. These signals are supportive context, but they do not make continued gains certain.

Key Takeaways PGY beat Q2 earnings estimates as record revenues and network volume lifted quarterly results.Pagaya posted record $387M in revenues and $3.54B in network volume, led by interest income and auto growth.PGY raised its 2026 outlook for network volume, GAAP net income and adjusted EBITDA. Shares of Pagaya Technologies (PGY - Free Report) have gained almost 19% since the release of its second-quarter 2026 results on July 30. Quarterly adjusted earnings per share of $1.07 comfortably surpassed the Zacks Consensus Estimate of 71 cents. The bottom line improved 67.2% from the prior-year quarter.

Results were aided by record performance across key metrics. The company recorded an improvement in total revenues, which, along with growth in network volumes, primarily supported the results. An increase in expenses hurt the results to some extent.

Net income attributable to Pagaya (GAAP basis) was a record $45.3 million, up significantly from $16.7 million in the prior-year quarter.

PGY’s Revenues Improve, Expenses RiseTotal revenues and other income were a record $387 million, up 18.6% year over year. The increase was driven by a rise in interest income and revenues from fees. A decline in net investment loss also supported the rise. The top line surpassed the Zacks Consensus Estimate of $358.2 million.

Total costs and operating expenses increased 4.2% year over year to $281.2 million. The rise was due to higher production costs.

In the second quarter, network volume was a record $3.54 billion, which grew 33.5% year over year, driven by growth in the company’s auto vertical, while maintaining focus on prudent underwriting.

Revenue from fees less production costs (FRLPC) was a record $146.9 million, which increased 16.4% year over year.

FRLPC as a percentage of network volume contracted by 60 basis points (bps) year over year to 4.2%, driven by asset class mix, new partner and product contributions, and tighter pricing on the asset-backed securities (ABS) transactions reflecting higher cost of capital in light of market conditions.

PGY’s Balance Sheet SolidAs of June 30, 2026, total assets were $1.69 billion, up 9.5% from Dec. 31, 2025.

Long-term debt was $471.9 million and shareholders’ equity was $594.2 million.

In the second quarter, the company raised a record $3.7 billion in ABS funding across six transactions.

PGY Management’s OutlookQ3Management expects network volume of $3.425-$3.625 billion.

Total revenues are expected between $370 million and $390 million.

The adjusted EBITDA is expected to be $120-$130 million and GAAP net income is anticipated to be $42-$52 million.

2026The company raised its 2026 outlook.

Network volume of $12.5-$13.25 billion is expected, changed from the previously mentioned $11.45-$13 billion.

Total revenues are projected to be $1.425-$1.525 billion, changed from the previous $1.4-$1.575 billion.

Management raised its full-year net income guidance as well. It expects GAAP net income of $155-180 million, up from the previously mentioned $110-$160 million. Similarly, adjusted EBITDA is expected to be $460-$490 million, up from the previously stated $420-$460 million.

Our Take on PagayaSecular growth in embedded credit, rising efficiency, diversified funding sources and broader multi-product adoption will likely continue to drive Pagaya’s scalable and profitable expansion in the near term. However, uncertainty around the single-family rental strategy might limit the company’s near-term volumes.

Currently, PGY carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance & Expected Earnings Release of PGY’s PeersLendingTree, Inc. (TREE - Free Report) reported second-quarter 2026 adjusted net income per share of $1.27, which missed the Zacks Consensus Estimate of $1.46. The figure compares favorably with $1.13 in the prior-year quarter.

TREE’s results were affected by a decline in Consumer segment revenues and higher total costs. However, growth in revenues and adjusted EBITDA, along with strong Insurance segment performance, supported the results to some extent.

Upstart Holdings, Inc. (UPST - Free Report) is scheduled to report quarterly results on Aug. 4.

The Zacks Consensus Estimate for UPST’s quarterly earnings has been unchanged at 58 cents over the past week. The figure indicates 61.1% growth from the prior-year quarter’s actual.

Key Takeaways Pagaya trades below industry and peers on P/S and P/TB metrics despite improving profitability.PGY's AI-powered platform and capital-light funding model support resilience across lending cycles.PGY faces rising production costs, while unchanged earnings estimates may limit near-term upside. Pagaya Technologies (PGY - Free Report) appears attractively valued based on two widely used valuation metrics: price-to-sales (P/S) and price-to-tangible book (P/TB). Value investors often seek companies trading below their intrinsic worth or at a discount to peers, and PGY currently fits that profile.

The stock trades at a forward 12-month P/S ratio of 0.86X, significantly below the industry average of 2.78X. Moreover, as shown in the chart below, PGY’s current forward P/S multiple is well below its three-year peak, indicating that the stock is trading at a discount to its historical valuation.

PGY P/S (F12M)
Image Source: Zacks Investment Research

PGY also looks inexpensive on a tangible book basis. Its trailing 12-month P/TB ratio stands at 2.82X compared with the industry average of 3.99X.

PGY P/TB (TTM)
Image Source: Zacks Investment Research

The company’s valuation remains compelling even when compared with close peers. Upstart Holdings (UPST - Free Report) trades at a forward 12-month P/S ratio of 1.59X, whereas Virtu Financial (VIRT - Free Report) trades at 3.64X, both well above PGY’s 0.86X. Similarly, PGY’s P/TB TTM ratio of 2.82X is lower than Upstart’s 4.05X and Virtu Financial’s 5.59X.

Taken together, these valuation metrics suggest that Pagaya is trading at a meaningful discount relative to both its industry and key peers, leaving room for potential upside if the market reassesses the company’s value.

However, valuation alone does not make a compelling investment case. Investors should also evaluate Pagaya’s underlying fundamentals, earnings trajectory and long-term growth prospects before making an investment decision.

Key Factors Supporting PagayaDiversified AI-Powered Lending Platform: PGY’s core strength has been its resilient and adaptable business model. The company has transformed itself from a personal loan-focused platform into a diversified lending technology company with exposure across personal loans, auto lending and point-of-sale (POS) financing. This broader product mix reduces reliance on any single lending category, making revenue generation more resilient across economic and credit cycles.

At the same time, the company’s proprietary AI-powered technology has strengthened its competitive advantage. Its pre-screen solution enables banks and lenders to identify creditworthy existing customers and extend pre-approved loan offers without requiring a formal application. This not only expands credit access but also helps lending partners increase customer engagement and wallet share while keeping customer acquisition costs low.

Capital-Light Funding Model: Unlike traditional lenders, Pagaya follows an asset-light business model and generally does not retain loans on its balance sheet. Instead, loans originated through its AI-powered network are quickly transferred to institutional investors through asset-backed securities (ABS) and forward flow agreements.

Supported by a network of more than 160 institutional funding partners, this funding model provides a diversified and dependable source of capital while reducing reliance on public securitization markets.

By keeping credit exposure low and limiting balance-sheet risk, Pagaya has maintained financial flexibility and liquidity even during periods of elevated interest rates and volatile capital markets.

Improving Profitability: Pagaya has been translating strong revenue growth into improving profitability through higher operating leverage and disciplined cost management. As transaction volumes and monetization increased in 2025, revenues grew faster than operating expenses, driving margin expansion, a sharp increase in adjusted EBITDA and a return to sustained GAAP profitability.

This momentum continued into the first quarter of 2026, supported by continued expense discipline and solid performance across the personal loan and auto lending businesses. Reflecting confidence in its scalable platform and profitability trajectory, management expects 2026 GAAP net income of $110-$160 million.

Analyzing PGY’s Price PerformanceDespite improving fundamentals, PGY shares have declined 20.5% year to date, underperforming both the industry and the broader market. The industry has lost 10.9%, while the S&P 500 Index has returned 7.8%. The disconnect between operating performance and stock price suggests that investors remain cautious toward the fintech sector despite Pagaya’s improving profitability.

The performance of PGY has been better than that of Upstart but worse than Virtu Financial. Upstart shares have lost 36.4%, while the VIRT stock has appreciated 76.1% year to date.

PGY’s YTD Price Performance
Image Source: Zacks Investment Research

How to Approach the Pagaya Stock?Given its resilient business model and capital-efficient funding strategy, PGY continues to stand out in the fintech space. Its AI-driven platform and reliance on forward flow agreements shield it from market volatility and credit risks.

Moreover, the stock trades at a discount relative to peers like UPST and Virtu Financial, making its valuation attractive.

However, the company has been witnessing a persistent increase in expenses over the past few years. Over the last three years (2022-2025), total costs and operating expenses saw a compound annual growth rate of 1.2%, mainly because of elevated production costs. Since production costs are highly correlated to the company’s network volume, the metric is anticipated to keep increasing in the near term as the value of the company’s assets originated by its partners with the assistance of AI and with respect to single-family rental operations grow. Thus, rising expenses will hurt PGY’s bottom-line growth to an extent.

Analysts do not seem optimistic regarding PGY’s earnings growth potential. Over the past 30 days, the Zacks Consensus Estimate for Pagaya’s 2026 and 2027 earnings has been unchanged at $3.23 and $3.72, respectively.

PGY’s Earnings Estimate Revision Trend
Image Source: Zacks Investment Research

Overall, Pagaya combines an attractive valuation with improving profitability, a scalable AI-driven platform and a capital-light business model. These strengths make the stock appealing for long-term investors seeking exposure to the fintech lending space. However, rising production costs and the absence of upward earnings estimate revisions suggest that near-term upside may remain limited.

As such, existing shareholders can continue to hold the stock, while prospective investors may prefer to wait for a more attractive entry point or clearer evidence of sustained earnings momentum.

At present, Pagaya carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.