Tightening Stablecoin Regulation And Slowing Tokenization Adoption Will Pressure Long-Term Earnings Potential

Catalysts

About Circle Internet Group

Circle Internet Group operates a global Internet native financial infrastructure platform centered on USDC and related onchain payment, treasury and tokenization services.

What are the underlying business or industry changes driving this perspective?

• As traditional financial institutions accelerate tokenization of money market funds and other securities, any delay or misstep in Arc mainnet launch or USYC positioning could see banks and rival platforms win key mandates. This could cap Circle's take rate on capital markets volumes and limit high margin subscription revenues and associated earnings growth.
• Regulators worldwide are moving from permissive experimentation to prescriptive stablecoin and onchain payments regimes. If licensing, capital or reward constraints tighten faster than Circle can adapt, distribution incentives may rise and product rollout may slow, pressuring RLDC margins and overall profitability.
• While cross-border and B2B stablecoin payments are scaling rapidly, banks and card networks are now building competing onchain corridors. If they push proprietary or closed alternatives, CPN volumes could skew to lower fee, utility only flows, flattening transaction revenue growth and constraining EBITDA expansion.
• The rapid build out of non dollar stablecoins and tokenized bank money on enterprise ledgers threatens to fragment liquidity across currencies and networks. If USDC loses its central settlement role in these multi currency rails, Circle's share of reserve income and network driven revenue could underperform circulation growth and compress net margins.
• High dependence on short term reserve yields and aggressive investment in platform expansion mean that a turn in rate cycles combined with slower than expected institutional adoption of DeFi based financial primitives could leave revenue growth outpaced by rising operating expenses, dampening future earnings scalability.

Assumptions

This narrative explores a more pessimistic perspective on Circle Internet Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Circle Internet Group's revenue will grow by 16.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -8.3% today to 15.8% in 3 years time.
• The bearish analysts expect earnings to reach $606.2 million (and earnings per share of $2.36) by about December 2028, up from $-200.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.7 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 36.4x on those 2028 earnings, up from -97.0x today. This future PE is greater than the current PE for the US Software industry at 31.9x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The stablecoin and broader tokenization market is expanding rapidly, with USDC circulation up 108% year on year to 73.7 billion dollars and total stablecoins in circulation up 59 percent. If this secular growth continues it could support sustained revenue expansion and long-term earnings growth.
• Circle is gaining market share in a winner-take-most market structure, with USDC share of stablecoin circulation at 29 percent and share of stablecoin transaction volumes at 40 percent. If these network effects strengthen further they may underpin resilient revenue growth and support higher net margins over time.
• High margin, scalable revenue lines such as subscription and services from blockchain partnerships and other revenues have grown from less than 1 million dollars to 29 million dollars. If this mix shift continues, it could structurally improve Circle's profitability and adjusted EBITDA margins.
• Circle Payments Network is seeing rapid early traction with over 100x growth in monthly payment volumes to an annualized 3.4 billion dollars and a pipeline of 500 financial institutions. If this network scales successfully it could become a durable engine of transaction revenue and margin expansion.
• Arc Network and USYC are positioning Circle at the center of tokenized capital markets, with USYC already the second largest tokenized money market fund at about 1 billion dollars and Arc testnet attracting global financial institutions. If institutional adoption of onchain finance accelerates it could drive sizable incremental revenue and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Circle Internet Group is $60.0, which represents up to two standard deviations below the consensus price target of $141.13. This valuation is based on what can be assumed as the expectations of Circle Internet Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $280.0, and the most bearish reporting a price target of just $60.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $3.8 billion, earnings will come to $606.2 million, and it would be trading on a PE ratio of 36.4x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $82.64, the analyst price target of $60.0 is 37.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.