Circle Internet Group (NASDAQ: CRCL) recently announced its quarterly earnings, revealing a notable uptick in performance metrics. Nonetheless, investor enthusiasm appears to have waned following these revelations.
The total supply of USD Coin (USDC) has surged to an impressive $61.3 billion over the past year, demonstrating a remarkable 90% year-on-year growth. Revenue, bolstered by its reserves, also saw a significant climb, increasing by 53% to hit $658 million.
Despite these positive figures, analysts from Mizuho Securities suggest that there is growing skepticism among investors. The analysts attribute this to a noticeable disconnection between Circle’s anticipated growth trajectory for USDC and the actual market dynamics.
Challenges from Rising Expenses and Competition
The quarterly growth of USDC was recorded at 6%, which starkly contrasts with Circle’s ambitious target of 40% compounded annual growth. This disparity raises valid concerns about the company’s ability to meet its long-term goals.
Moreover, escalating costs associated with USDC distribution have emerged as a significant issue. Mizuho analysts revealed that these costs have surged from 39% of the reserve pool in 2022 to a staggering 61% in 2024, with the second quarter reaching 64%. Such rising expenses could obstruct profit margins, particularly in a climate of slowing revenue growth.
The competitive landscape has also intensified, especially with the implementation of the GENIUS Act, which may encourage more financial institutions to issue their own stablecoins.
Additionally, Tether, which reigns as the leading stablecoin issuer by market cap, is reportedly contemplating a resurgence in the US markets. This combination of regulatory changes and increasing competition could further challenge Circle’s standing in the industry.
Inflation Trends and Interest Rate Impact
Circle’s profitability is notably susceptible to fluctuations in US interest rates. The latest data from the US Labor Department indicated a 2.7% annual increase in the Consumer Price Index (CPI) for July, landing slightly below what analysts had anticipated. This has led to discussions that the Federal Reserve may soon consider cutting interest rates.
While reduced inflation can be beneficial for the overall economy, Mizuho cautions that it might adversely impact Circle’s earning potential, particularly since the company’s reserves thrive in a higher interest rate environment.
In their recent analysis, Mizuho predicted Circle’s EBITDA for 2027 would fall below industry consensus, utilizing a market multiple of 23x—similar to competitors like Visa, Coinbase, and Robinhood—to derive a price target of $84 per share. Conversely, their pessimistic scenario, assuming a more tempered 15% CAGR for USDC and decreased interest rates, suggests a potential share price decrease to $40.
As Circle navigates through upcoming quarters, its success will likely hinge on its ability to manage rising costs efficiently, contend with an increasingly competitive stablecoin market, and adapt to any shifts in interest rate policies.
For the time being, Circle maintains a strong position in the stablecoin arena, yet achieving a delicate balance between growth, operational efficiency, and market share preservation is essential for its sustainable future trajectory.
Featured image created with DALL-E, Chart from TradingView
