Goldman Sachs comments on Circle: Three factors put pressure on profit margins, cross-border payments are a breakthrough

Author: Zhao Ying, Wall Street News

Following JPMorgan Chase's $80 target price, Goldman Sachs also came to short Circle, saying that although it has unique value, it is overvalued and its profit margins are also facing multiple pressures.

In its latest report, Goldman Sachs first covered stablecoin issuer Circle with a neutral rating and a target price of $83. The target price is based on a 60x Q5-Q8 adjusted price-to-earnings ratio, which is 54% lower than the current stock price.

Goldman Sachs analysts believe that Circle, as the issuer of USDC stablecoins, has a unique position in the public market and is the only pure crypto-native company that is expected to benefit from the expansion of the existing fiat currency market without directly bearing the price volatility of cryptocurrency transactions. The company expects to achieve a 40% compound annual growth rate in USDC supply and a 26%/37% revenue/adjusted earnings per share growth rate during 2024-27.

However, the current forward price-to-earnings ratio of about 145 times is significantly higher than the average level of about 35 times in the industry, which makes Goldman Sachs still wait and see in the face of strong business prospects. At the same time, Goldman Sachs pointed out that there are three factors that may put pressure on yields, namely interest rate cuts, USDC being diverted by income-generating products, and rising distribution costs.

In addition, Goldman Sachs pointed out that the US dollar stablecoin is seeking to open up new growth space outside of cryptocurrency trading, and the cross-border payment and legal currency trading markets have become the most disruptive areas. Goldman Sachs expects the revenue pool of the cross-border payment market to be about US$30 billion to US$50 billion, but Circle's cross-border payment network (CPN) is still in its early stages and has not yet solved core pain points such as foreign exchange conversion.

Unique market position supports steady growth

As the issuer of the second largest stablecoin USDC, Circle has a market value of US$40 billion, accounting for 25% of the stablecoin market share. USDC's primary use is as a key component of the cryptocurrency market infrastructure, facilitating payments and acting as collateral for transactions.

Goldman Sachs predicts that USDC is expected to grow by $77 billion between 2024-27, driven primarily by $30 billion in share growth on Binance, $15 billion in share growth on other platforms, and $33 billion in organic growth. This growth expectation is based on two existing major use cases: the crypto ecosystem and providing access to USD without entering a new total addressable market.

Binance partnership brings significant opportunities. Since the partnership with Binance in December 2024, the USDC balance on the Binance platform has grown by $6 billion, and USDC's share of Binance stablecoins has increased from 9% to 23%. It is expected that $30 billion in USDC share growth will be obtained from the Binance platform between 2024-27.

In addition, Goldman Sachs believes that regulatory compliance advantages drive market share growth USDC adopts a highly compliant approach, which complies with the current EU stablecoin regulatory requirements and the pending stablecoin legislation in the United States, which provides strong support for its continued market share growth. It is expected to gain an additional $15 billion in market share from competitors such as USDT.

Reasons for bearish stock prices: Overvaluation and three factors put pressure on profit margins

Although Circle has a solid business foundation and good growth prospects, Goldman Sachs' main reasons for bearishness focus on overvaluation and multiple downside risks.

Valuation seriously deviates from fundamentals: Circle's current forward adjusted P/E ratio of 145 times is far higher than the average of 35 times in the industry. Even considering that its 26%/37% revenue and net profit compound annual growth rate is better than the 11%/7% of its peers, such a huge valuation premium is still difficult to rationalize. Goldman Sachs' $83 target price is based on a 60x P/E ratio, which is higher than the highest level in the industry, but still means a 54% downside.

Interest rate cuts: Circle's business is highly dependent on the interest rate environment, and the yield on reserve assets is closely related to the federal funds rate. Goldman Sachs estimates that every 25 basis point interest rate cut will result in a revenue impact of approximately 5.5% and an adjusted earnings per share impact of 10.5%. The market currently expects five interest rate cuts in 2025-26, which will put significant pressure on Circle's profitability.

USDC is diverted by yield-generating products: Since USDC does not pay interest to holders, customers may gradually turn to yield-generating alternatives such as tokenized money market funds. This substitution threat may lead to a loss of USDC market share, thereby affecting Circle's revenue growth.

Pressure on rising distribution costs: To maintain ecosystem growth, Circle needs to continue to increase incentive spending on partners. Currently, Circle distributes about 61% of its reserve revenue to its partners. As competition intensifies, this proportion may rise further, compressing net income margins.

Cross-border transfers may become a breakthrough

The stablecoin USDC is eyeing huge market opportunities beyond cryptocurrency trading. Goldman Sachs estimates that its potential market size in payment infrastructure and legal currency trading can reach hundreds of billions of dollars, but these applications are still in the verification stage.

Cross-border payments are seen as the most likely area to be disrupted by stablecoins first. Analysis shows that the retail cross-border payment market revenue pool is about 30 billion to 50 billion US dollars. The high transaction costs and complex and inefficient infrastructure in this area provide an opportunity for stablecoins to enter.

Circle has launched the first phase of the cross-border payment network CPN, but the platform only completed its first transaction in mid-May, and has not yet solved the core pain points of cross-border payments, including the "last mile" delivery and foreign exchange conversion.

The overall payment infrastructure market is much larger, with an estimated value of between $160 billion and $280 billion, but analysts believe it will take years to gain share in this mature and efficient market.