Shares of Circle Internet Group (CRCL 9.89%) closed 10.2% lower on Thursday. The issuer of the popular USD Coin (USDC 0.01%) stablecoin received a skeptical review from analyst firm Compass Point.
Circle's growth is coming from the wrong places
Compass Point analyst Ed Engel lowered his Circle recommendation from "neutral" to "sell." The firm's target price dropped from $79 to $77 per share, citing signs of lower profit margins in recent USD Coin activity.
More specifically, USD Coin has seen dramatic usage growth on crypto-trading platforms carrying costly distribution deals with Circle. Crypto brokerages without these deals tend to generate more profit for Circle, so Engel expects disappointing gross margins and bottom-line profits under these circumstances.
NYSE: CRCL
Key Data Points
Big revenue, shrinking margins, red ink ahead
Circle's revenues soared to $2.75 billion in fiscal year 2025, a 64% increase from 2024. But the gross profit margin fell from 10.5% to 5.9%, leaving little room for positive earnings if the compression continues in 2026. Indeed, Circle moved from strongly positive earnings in 2023 to lower profits in 2024 and red ink on the 2025 bottom line.
It's not easy to turn a profit by managing a cryptocurrency that's always worth exactly $1 per coin. That's especially true in a wobbly economy with limited access to high-yield debt papers.
Circle may seem better off avoiding the profit margin hit from generous distribution deals, but that's a shortsighted analysis. Like many growth stocks, Circle is taking some losses while building a large customer base.
Image source: Getty Images.
Circle has dropped 43% from its October highs, which sounds like a bargain until you check the price tag. Circle's stock still trades at 49 times trailing earnings and 7.6 times sales. That's a lot of optimism baked in for a company whose margins are moving in the wrong direction.
Risk-tolerant investors might see this pullback as an entry point. More conservative investors have another option: simply holding USD Coin itself. The stablecoin yields around 4.1% on lending platforms, and it's never lost 43% of its value in half a year. It's also never gained 43%, to be fair. But that would certainly be a safer way to play the stablecoin market.
