Artificial intelligence (AI) credit company Pagaya Technologies (PGY -4.68%) stock jumped 21% in May according to data provided by S&P Global Market Intelligence. It reported excellent first-quarter results, and management is guiding for lots more to come.

AI is driving a better financial platform

Pagaya operates a platform connecting banks, borrowers, and institutional lenders. Although its products revolve around its AI-powered credit evaluation platform, it describes itself as creating financial solutions to empower all kinds of people.

It's already working with many top financial companies that are using its platform for credit evaluation and risk management, including Visa, Ally Financial, and SoFi Technologies, but it has a strong pipeline of new clients that it's onboarding. It recently announced several new deals, including a partnership with U.S. Bank.

Pagaya reported another round of excellent results in the 2024 first quarter, exceeding guidance for all metrics. Both revenue and network volume increased 31% year over year, which is a fantastic showing in the high interest rate environment. Revenue from fees less production costs (FRLPC), its preferred bottom-line metric, increased 84% to $92 million. FRLPC margin improved by 1.1 points to 3.8%. That trickled down to increased adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from $2 million to $40 million and the third straight quarter of positive operating income at $8 million.

Generally accepted accounting principles (GAAP) net income is still in the red at $21 million, but that was an improvement of $40 million from last year. Wall Street expects Pagaya to become net profitable on a GAAP basis next year.

Is Pagaya stock too risky?

Pagaya is demonstrating superb performance and has incredible opportunities, but it's not for the risk-averse investor. For starters, it's still not profitable. That might change soon, but there are no guarantees. It's also only been on the stock market for two years and in operation since 2016. That's not a long track record.

It operates in a less transparent area of finance, and investors should stay away from businesses that they don't completely understand. Also, its products are susceptible to acute changes in economic policy, like other financial companies.

Finally, it recently issued a 1-for-12 reverse stock split meant to increase its stock price so that it could be eligible for inclusion in certain indexes. That's meant to improve shareholder value. It's already seeing the results of this maneuver, and last week it was selected for inclusion in the Russell 2000 and Russell 3000 indexes beginning on July 1. However, immediately after the reverse split, it issued more stock at a much lower price than the newly leaner stock, setting off a tumble.

It also just opened offices in New York. In other words, there are a lot of moving pieces here, and they don't all breed confidence.

Pagaya stock could turn into a multibagger, but potential investors should know the risks.