Circle: To Predict The Selloff, All You Had To Do Is Learn The Business (Upgrade)

Summary Circle Internet Group has seen a sharp 46% drawdown after a momentum-driven surge post-IPO, but fundamentals are now in focus. CRCL's business model relies heavily on reserve income from USDC circulation, which is highly vulnerable to declining interest rates.

Valuation remains stretched at 58x forward EBITDA and 1. 1x reserves.

The stock trades more on momentum than fundamentals, with limited upside and significant risks. I upgrade CRCL to 'Hold' for risk-tolerant investors, but caution against entry until valuation multiples become far lower.

Shares of Circle Internet Group, Inc. ( CRCL ) are in the midst of a sharp, yet predictable , 46% drawdown.

After the maker of the USDC stablecoin has seen its shares surging based on momentum, fundamentals are slowly becoming a bigger part of the story. I argue that the downside has narrowed substantially and that the business is progressing well.

However, all valuation angles still point to the downside, and I believe that there's still a misunderstanding of the company's business. Let's dive in.

Circle's Perfect 'Memefication' Storm Circle Internet Group, Inc. ( CRCL ), provid er of the USDC stablecoin, went public in early June.

This was right when stablecoins became the hottest topic in town, as the GENIUS Act was being passed through Congress. Appealing to the type of investors who follow momentum, the combination of an IPO, positive regulatory developments, and bullish headlines was really the perfect formula for a non-fundamental stock surge.

Data by YCharts Indeed, Circle stock surpassed the $240 mark at some point, more than doubling its initial trading price in the span of a few weeks. At the time, I published an article seeking to simplify the company's business model for investors so they can understand there's at least 50% downside to any reasonable valuation metric.

Data by YCharts The stock is now down almost 50% since, though still up over 18% from the first trading price, after a 10% recovery from its lows. So, with my downside prediction almost fully exhausted, this would be a good time for an update.

First, let's give a quick overview of the business. Please, Learn The Business Model, And Listen To What Circle's Management Is Saying I cannot stress this enough.

Investors who buy a stock without understanding how the company generates revenue and what its costs are will almost always lose money. They might get lucky with one investment, but this is not a winning formula in the long term.

By investing in companies solely based on momentum, you are likely to be the last one dancing when the music stops. In Circle's case, the business model isn't that complicated either.

The company went as far as dedicating a slide in its earnings presentation to explain it: Circle Q2'25 Presentation I wrote in my last article : Over 95% of the company's revenue comes from reserve income. That reserve income is generated from interest paid on its short-term T-bills and other cash-equivalent assets that Circle holds and buys in accordance with USDC creations.

The cycle goes in three steps. The customer converts fiat or other forms of cryptocurrency to USDC.

Then, Circle or one of its authorized mint partners mints a USDC. Then, Circle purchases a T-bill at the corresponding value to meet the 1:1 reserve needs.

Typically, Circle holds a small, non-material surplus. On that reserve income, Circle pays distribution costs to companies like Coinbase ( COIN ) and others, with a calculation that's a bit of a mouthful, but it comes down to roughly 58%-62% of reserve income.

They define that as the RLDC margin, or revenue less distribution costs margin. The rest of the revenue is coming from services that rely on USDC.

Those include, for example, payment acceptance by companies like Shopify ( SHOP ). Those revenues are similar to those of most fintech businesses.

Below the revenue and gross profit lines, Circle has operating expenses like any other company. Let's dive into each of the business metrics in Q2.

Business Progressing Well In Q2, As Investors Get More Insight With every new company, it takes time for investors to gain more understanding of the company's business, grow accustomed to its reporting, and familiarize themselves with management. Circle Q2'25 Presentation In Q2, total revenue and reserve income grew 53% Y/Y to $658 revenue, with RLDC margins dropping to 38% as they continue to focus on expanding the network.

Other revenue was $24 million, still minuscule relative to reserve income, but growing rapidly. Circle Q2'25 Presentation USDC in circulation reached $61.

3 billion as of the end of Q2, up 90% Y/Y, and it's at $72. 4 billion as of September 11th.

Circle's share of circulation in Q2 reached a record 10%, while Coinbase and others represented 21% and 69%, respectively. The reserve return rate dropped to 4.

14% as expectations for rate cuts rise and yields drop. Circle Q2'25 Presentation Looking at profitability, gross profit was $251 million, while operating loss was $325 million, the first on record, as compensation expenses jumped sharply due to vesting RSUs in connection with the IPO.

Adjusted EBITDA, which excludes these expenses, was $126 million, 19% of total revenue and 50% of gross profit. Circle Q2'25 Presentation Looking ahead, management expects USDC in circulation to continue growing at a 40% CAGR.

For 2025, they see other revenue of $75-$85 million, RLDC margins of 36%-38%, and adjusted operating expenses of $475-$490 million. Overall, this was a very good quarter when it comes to growth, with continued strength in circulation growth and the addition of 0.

8 million meaningful wallets. Investors will have to remain patient in finding out the company's profitability trajectory, especially as the reserve rate is dropping.

Circle Continues To Trade On Momentum Rather Than Fundamentals After learning the business model, I think it's clear that the primary fundamental drivers for Circle's valuation are USDC circulation growth, reserve rates, and Circle's share of circulation. The main driver for circulation growth remains crypto adoption, while the main driver for reserve rates is interest rates.

Data by YCharts Right now, it seems clear to me that Circle, like many other crypto-related stocks, is trading in correlation with Bitcoin. With that in mind, I personally think it makes much more sense to just buy Bitcoin if all you're looking for is capitalizing on momentum.

If you're looking to make an investment based on fundamentals, then let's get to valuation. Valuation In my last article, I outlined three ways to evaluate Circle.

Bearish Scenario: Valuation Based On Equity I explained: Circle, in some sense, operates like a bank. It has the 'deposits' of users who are buying USDC, which it then uses to provide 'loans' in the form of T-bills.

Banks are generally valued based on P/B. On that metric, Circle is hugely overvalued at 12 times book value (JPMorgan, for reference, is at 2.

4). However, I wrote: Unlike a bank, Circle isn't bound by its equity to grow its 'loan book', which means there isn't a direct relationship between profits and book.

As such, I don't think it's an accurate way to evaluate the company. Base Scenario: Tech Company Valuation From the Circle's shareholder perspective, what matters at the end of the day is the net income or free cash flow the company generates.

The problem is that net income was negative, and free cash flow came almost entirely from stock-based compensation adjustments. So, we'll have to go with the next best thing, which is adjusted EBITDA.

In Q2, adjusted EBITDA was $126 million, run-rating at roughly $500 million. Data by YCharts This places them at 58 times forward EBITDA, which is very, very high.

Coinbase, for instance, is trading at half that valuation. That said, you can make the argument that Circle's adjusted EBITDA is growing much faster, at 52% Y/Y.

The problem I have with that argument is that this growth came due to a 90% increase in USDC circulation, offset by a 1-point drop in reserve return rate. With circulation growth slowing materially and reserve rates continuing to fall, investors shouldn't expect a continuation of this adj.

EBITDA growth rate, which means the 58 times multiple is tough to swallow. Bullish Scenario: Valuation Based On Reserves On Circle's balance sheet, below the cash and cash equivalents line, there's the reserves account.

This metric is also updated on an ongoing basis on the company's website . As of September 11th, reserves stood at $72.

4 billion. Those reserves primarily include short-term T-bills, which, for most companies, are accounted as cash equivalents.

Circle's case is different because those reserves are pegged to USDC circulation. In simple words, if all USDC holders woke up tomorrow and decided to convert into regular Dollars or Bitcoin, then Circle would need to liquidate all its reserve assets.

In that event, if you evaluated the company based on reserves, its valuation would drop to zero. However, if you're looking to invest in Circle, your baseline assumption is that USDC circulation not only wouldn't go to zero, but it would grow substantially.

Importantly, you shouldn't take the entirety of reserves but rather only those that Circle has the entitlement to generate reserve income from. Meaning, you should take Circle's RLDC margin and apply it to reserves.

Created and calculated by the author based on Circle data. As we can see, that calculation brings us to a 1.

1 price/reserves multiple based on current reserves, which reflects about 10% downside. Conclusion All in all, I really like what Circle is doing, and I think they are making significant progress with their business.

However, I believe the actual use cases for stablecoins are much smaller than what bullish investors are estimating. I also find the company's valuation still rich, and I find that the stock continues to trade almost entirely based on momentum.

The downside is no longer big enough to justify my previous 'Strong Sell' rating, but I still view Circle as a very risky investment. I upgrade the stock to 'Hold' for risk-seeking investors, but I, personally, wouldn't let my hard-earned money get exposed to such inflated risks.

I would wait for a much lower EBITDA multiple before considering entering a position or a price/reserves ratio that leaves room for market share losses.