Summary Circle is well-positioned in the growing Stablecoin market, with strong partnerships and a flexible business model for future digital currencies. Revenue is driven by reserve size and interest rates, but distribution costs and market share uncertainty present risks to long-term earnings. The current valuation at $43B reflects future growth, but does not adequately discount risks or offer an attractive entry point for investors. I am optimistic about Circle's future, but recommend a hold rating until shares trade closer to $95, reflecting a better risk/reward balance. Circle Internet Group ( CRCL ) had its IPO this spring, with an offering price at $31 that rose in the ensuing weeks to a high of $263 and recently settling around $188. With such new stocks, folks naturally wonder what is the right price to buy. I believe Circle has an important role to play in the future of global finance with its Stablecoin products. Nevertheless, the IPO is still in its honeymoon phase, and I don't find recent prices to be good for an entry. For that reason, I rate it a Hold until a better entry presents itself. My Recent Thoughts On Stablecoin Before I was thinking about CRCL as an investment, I had become a new, but firm believer in Stablecoin products, primarily USDC ( USDC-USD ). This was in the context of analyzing Coinbase ( COIN ), who uses USDC specifically out of the other USD Stablecoins. When I first rated COIN a Buy in February, I observed: Subscription and Services Revenue, by comparison, proved much more stable across quarters, but YoY growth was here still a strong 64%. It was a particularly good year for Stablecoin and Blockchain rewards, and I believe it continues to solidify the importance of their long-term model. COIN Q1 2025 Shareholder Letter In my second Buy rating , I noted the following: This was largely driven by a decline in the cyclical transaction-based revenue. Crucially, their non-cyclical revenues grew 9% , indicating that they are forming a stable, core business. My Buy rating both times depended on Coinbase growing its long-term cash flows through consistent, subscription-based services, of which Stablecoin is a key contributor. At the same time, I remembered remarks during a March 2024 Morgan Stanley investor conference , in which Coinbase's Founder-CEO Brian Armstrong stated: So if you look at a number of emerging markets around the world, people -- especially where people have high inflation, they've started to use dollar-backed stablecoins. And so we made a big effort to get USDC, which is one of the largest stablecoins out there....So we're already starting to see people adopt that in places around the world. And I think like it kind of makes sense. None of us really think it makes sense to pay 2% to Visa every time you swipe your credit card. It's just sending bits of data... I think payments are going to flow to the path of least resistance over time. Thus, there was a very real use case to this, a value-add. We know the saying, "What's good for the goose is good for the gander." If COIN is the goose in this case, we then have to ask ourselves if that makes CRCL, maker of USDC, the gander. Circle's Business Model As I mentioned already, Circle mints USDC as Stablecoin for the dollar. These digital equivalents are minted whenever Circle receives deposits of the underlying fiat currency, which fill Circle's reserves. Circle can theoretically tokenize any currency in this way. CRCL IPO Prospectus From there, they receive interest and dividends on these reserve assets, and this is the basis for nearly all of their revenue. The table above shows it succinctly, with revenue roughly equaling the reserve return rate on their average USDC in circulation. (Also, make a note of their market share ranging from 20% to 34%). Revenue is therefore driven by two variables: Size of reserves Reserve return rates Note, for example, that revenue increased between 2022 and 2023, despite the decline in average USDC in circulation. This is because declines in their base of assets to earn yield were more than offset by increases in rates. In this sense, Circle's business is influenced by the interest rate cycles of central banks like the Federal Reserve for any of its Stablecoin products (now and in the future). To summarize it another way, imagine a bank where you can deposit money but where the bank earns short-term interest rates on the account instead of you. That is how Circle monetizes Stablecoin. Collaboration with Coinbase Their partnership with Coinbase is worth examining because simply minting USDC is not enough, and crypto exchanges like Coinbase play an essential role in distribution. As the prospectus from their IPO explains (pg. 154): Pursuant to the agreement, we shared any revenue generated from USDC reserves pro rata based on the amount of USDC distributed by each respective party and the amount of USDC held on each respective party’s platform in relation to the total amount of USDC in circulation. Coinbase did not have any specific obligations to distribute or otherwise transact upon USDC once issued by us. However, the foregoing payment structure provided incentives for Coinbase to distribute USDC, thereby growing the usage of USDC and increasing USDC liquidity. I singled this part out because it is a major expense in their business model. Not all of the reserve yield is retained by Circle. CRCL IPO Prospectus The table above shows that distribution costs in such an arrangement are the biggest expense item. Operating expenses, by comparison, are much lighter. It's the cut they must sacrifice for the product to sell, however, as it gives Coinbase skin in the game of USDC's success, along with any other Stablecoin products that may emerge with time. Future Outlook So let's remember the advantages of Stablecoins as we think about the future of this business: Near-instant settlement of transactions (domestic and international) Lower costs than the likes of Visa ( V ) or another traditional middleman None of the volatility of using Bitcoin ( BTC-USD ) to transact These features make Stablecoins very likely, in my view, to be the future of global finance. Circle also has the ability to mint other Stablecoins besides USDC, depending on what occurs with national currencies in the future. Put another way, the Stablecoin market isn't intrinsically tied to a single currency. Circle is positioned to mint digital coins and earn yield in whatever the preferred and necessary currencies may be in the future. The real question is what is a good price to own shares in that business, and that will be influenced by these three things: Future reserve return rates Future size of the global Stablecoin market Circle's share of that market As the Federal Reserve has been guiding for rate cuts, we can expect that they will be somewhat lower in the coming years, but as cuts occur more slowly than the hikes did, they may not be that much lower. Whatever the case, this can just inform our idea of a low-end and high end of Circle's intrinsic value, based on the cyclical nature of interest rates. The second two bullet points are the main riddle, as they determine just how much in reserves Circle will possess to produce yield. Citigroup ( C ) issued a report with their own estimates of the growth of the Stablecoin market (measured in total reserve assets) by 2030, providing a range of $500B and $3.7T. Obviously, this is a big range, with Citi finding the $1.6T market size to be the most likely. Stablecoin Market Cap History (defillama.com) DefiLlama shows that the Stablecoin market has been growing, coming from near-zero about five years ago. It currently stands around $250B, and if it reaches $1T, that's a 4X. All else being equal, this should mean that earnings of Circle should grow by 4X, plus any additional margin improvements from operating leverage on their asset-light business. CRCL IPO Prospectus Q1 2025 showed net income of about $64.8M, for about $78.7M in earnings if we add back depreciation and amortization. Annualized, that's about $314.8M in earnings. If the Stablecoin market reaches $1T, ceteris paribus, Circle should be earning $1.26B on the 4X alone. Let's assume operating leverage gives them better margins at scale, for about $1.5B. CRCL's current market cap is $43B. That's a multiple of 28, something of a premium for earnings that haven't happened yet. If the combined Stablecoin market cap reaches the upper end of Citi's estimate, then $43B is a future P/E under 10, maybe this an acceptable entry price. "If" and "future" are keywords. It's not a single-digit P/E today , and while I am sure the advantages of Stablecoin will cause its market cap to grow, I'd want a safer entry price before buying into it. We must also remember that Circle may not maintain market share as Stablecoins grow, that yields may decline, and that they may be forced to give up margin to distributors to stay competitive against other Stablecoin products. All three could happen at once, and $1.5B in earnings seems like a blessing in that event. Investors are not being offered a discount to the growth story at a $43B market cap, for $189 per share, nor are they pricing in these plausible risks. I think a better entry price should be about half, at $95 or less, but the market seems to be in a bit of a honeymoon phase with CRCL. Conclusion I believe Circle is properly aligned with a crypto-space leader in Coinbase. I also believe the flexibility in their ability to tokenize other currency as future trends may dictate mitigates a lot of risk. Their cost advantage over legacy payment processors like Visa also seems to make wider adoption inevitable at this point. The speed of the growth of this market, as well as how much stake in it Circle will be able to keep, is highly uncertain. Long-term investors need an entry price that factors is the range of risks, and I don't think the current share price offers that. I am hopeful about the future of this business, but for now, it's appropriate to be patient and rate the stock a Hold.
