Is Circle Stock Worth the Hype After Its Big IPO? This Analyst Says Yes. — Barrons.com

By Nate Wolf

Investors have plenty of reasons to be skeptical of the stablecoin issuer Circle Internet Group.

Without a single earnings print or earth-shattering announcement, Circle shares are up more than 650% from a June 5 initial public offering price of $31. Entering Friday, the stock had climbed double-digit percentages on six of ten trading sessions.

Surely, the much-hyped stock must be due to crash, right? The answer is no, according to Seaport Research Partners analyst Jeff Cantwell, who initiated coverage of Circle with a Buy rating and a $235 price target on Friday.

Right on cue, the stock was up another 22% Friday to $242.81.

Circle issues USDC, a cryptocurrency pegged to the U.S. dollar that the company launched in collaboration with Coinbase in 2018. As the regulatory environment around crypto eases, stablecoin adoption is poised to grow, Cantwell argued, and Circle is in position to capture a major chunk of the market and outperform its peers across fintech.

"We view Circle as a top-tier crypto 'disruptor' with a sizeable future opportunity," Cantwell wrote in a research note.

Stablecoin issuers notched a key win Tuesday when a bipartisan coalition in the Senate passed the Genius Act, a bill clarifying how stablecoins are regulated and requiring issuers to hold reserves of safe assets like Treasury bills. Once signed, the bill, combined with a growing interest in crypto writ large, should enable a surge in stablecoin adoption.

Seaport projects the overall stablecoin "market cap," which sits at $260 billion today, will hit $500 billion by the end of 2026 and potentially $2 trillion in the long run, as more companies store the currencies in their treasuries or use them for payments. USDC claimed 29% of the stablecoin market share as of March 31, according to Circle's IPO prospectus, second only to Tether Holdings' USDT.

"Areas like DeFi, cross-border payments, and ecommerce all potentially have the ability to go parabolic from here in terms of stablecoin adoption globally, in our view," Cantwell wrote.

Circle earns interest on its reserve assets — this reserve income comprised between 95% and 99% of total revenue the last three fiscal years — so growth in USDC itself is the company's main revenue driver. With that in mind, the company is attempting to build the financial infrastructure needed to coax companies and their customers off the sidelines and into the world of crypto.

Cantwell believes Circle will succeed, arguing the company is on track for 25% to 30% annual revenue growth and "merits a premium valuation multiple."

The reserve income strategy makes Circle vulnerable to shifting interest rates, however. Every 25 basis-point rate cut would slash the company's 2026 estimates for earnings before interest, taxes, depreciation, and amortization by about $100 million, according to Sean Farrell, head of digital asset strategy at Fundstrat. Stablecoin adoption would need to grow 10% to offset each 25 basis-point cut.

Circle also has to pay partners such as Coinbase to distribute USDC, which narrows the company's margins, Farrell added.

"Looking forward, we see more scenarios that pressure the business at current pricing than scenarios that unlock significant upside," he wrote on June 6, a day after the IPO, issuing a $59 price target.

Circle's sky-high valuation means Farrell's target reads like a joke now, but nothing under the hood has drastically changed in the last two weeks. That leaves Wall Street in the unenviable position of trying to discern whether the 650% share growth is "real."

The answer may come down to the future of stablecoins as an asset class, and for now, Circle is one of the few ways equities investors can claim a stake. Tether isn't publicly listed, Coinbase is a partner rather than a true competitor, and crypto-related companies like PayPal Holdings and Block have tentacles in many other business areas.

"At the moment, crypto (and stablecoins, specifically) reminds us of Fintech back in '16, which was the time period before the space had matured, and much was still up for grabs," Seaport's Cantwell wrote. "Given the improving regulatory climate, to us it feels early days for Circle."

Write to Nate Wolf at nate.wolf@barrons.com

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