Circle Internet Group (NYSE: CRCL) experienced a notable decline in premarket trading on Monday, with shares falling 5.3% to $59.30. The drop comes as the company's flagship stablecoin, USDC, saw a reduction in circulation, casting a shadow over the upcoming second-quarter earnings report scheduled for Wednesday at 8 a.m. ET.
The decline in USDC supply has been significant. As of July 30, USDC circulation stood at $71.8 billion, representing a decrease of $5.2 billion, or 6.8%, from the $77.0 billion recorded on March 31. This contraction in the stablecoin's base is a critical metric for Circle, as reserve income constitutes the vast majority of its revenue.
Adding to the pressure, Morgan Stanley (NYSE: MS) downgraded Circle's stock to Underweight from Equal Weight and slashed its price target to $38 from $106. This bearish stance implies a potential 39% downside from Friday's closing price of $62.61, contrasting sharply with TD Cowen, which initiated coverage with a Buy rating and an $82 price target.
The reduced USDC base has direct financial implications. Based on the first-quarter reserve return rate, the lower average balance could translate to approximately $182 million less in annual gross reserve income, or roughly $45.5 million per quarter before distribution expenses. This calculation assumes constant yields and other variables, and should not be viewed as company guidance, but it underscores the sensitivity of Circle's earnings to the stablecoin's supply.
Circle's first-quarter results highlighted its heavy reliance on reserve income, which accounted for $653 million, or 94% of total revenue. All other income sources combined contributed just $42 million. With distribution, transaction, and other costs totaling $407 million, the revenue less distribution costs margin was 41%, leaving limited room to absorb simultaneous hits from lower balances, reduced yields, or higher partner payouts.
The interest rate environment offers little respite. The Federal Reserve maintained its target range at 3.50% to 3.75%, while three-month Treasury yields fell by 14 basis points by July 30. CFO Jeremy Fox-Geen has previously advised investors to look beyond a single rate cycle, telling Reuters in May, "Rates have cycles, and we are building a company that's going to be living through many rate cycles."
Analyst projections vary widely. Morgan Stanley reduced its 2027 USDC forecast by nearly one-third and its 2028 forecast by 44%, while TD Cowen expects USDC to grow at an annual rate of about 31% until 2030. This divergence highlights the uncertainty surrounding Circle's growth trajectory.
Circle's stock ended last week nearly flat, gaining just 0.4%, after a 2.5% drop on Friday to close at $62.61. That finish leaves shares 67% below their 52-week high of $189.92. The company did secure a regulatory win last week, receiving a limited-purpose trust charter from New York for its trust unit, which CEO Jeremy Allaire called a "longstanding objective" achieved.
As investors await Wednesday's webcast, key metrics to watch include average USDC balances, reserve return rates, distribution costs, and RLDC margin. The company had previously guided to a 38%-40% full-year margin and 40% USDC growth through the cycle. The immediate challenge for Circle is to demonstrate that the July decline in USDC was temporary or offset elsewhere, as merely reporting strong headline earnings may not be sufficient to reassure the market.
