OUSD Is Bad For Circle (Rating Downgrade)

Summary Circle faces a major existential threat from the newly announced OUSD stablecoin, backed by major financial and retail players. OUSD's consortium includes Visa, Mastercard, American Express, BlackRock, and Coinbase, undermining CRCL's growth prospects and competitive moat. I now expect Circle's revenue growth to flatten significantly, with net margins stagnating and valuation multiples likely to compress. Given these dynamics, I double-downgrade CRCL to a Sell, expecting negative annualized returns through the decade. In March of this year, I published an article titled "Circle: A Defensible AI Fintech With Explosive Stablecoin Growth (Rating Upgrade)." In the article, I made the case that Circle ( CRCL ) - issuer of the incredibly popular USDC stablecoin - was positioned for considerable revenue growth on the back of the growth of the crypto ecosystem, growth in agentic commerce, and ongoing promotion and tooling efforts that could widen the company's distribution of its core revenue generator. For those who don't know, Circle makes money primarily through reserve interest, the money earned from the assets that back USDC's dollar-for-dollar stablecoin promise. With only one main competitor, Tether, and significantly more regulatory clarity, I viewed Circle's growth trajectory as an incredible 'blue ocean' opportunity, with several routes for adjacent revenue growth as the company's new blockchain initiatives and features like the Circle Payments Network came into effect. However, yesterday, on June 30, a consortium of banks, card networks, asset managers, and retail operators announced the launch of OUSD , a competing stablecoin & standard, with a launch targeting later this year. On the face of it, stablecoins are launched regularly, but few have had the power and backing to compete directly with USDC for market share. The problem with OUSD is that all of the potential adopters for Circle's future payments network are now part owners of OUSD, including Coinbase, making this a very direct, relevant, and challenging threat. Circle makes money when USDC is chosen as a store of value within the crypto ecosystem, which only happens when it gains widely held market share and use from commercial players and retail users alike. Now, with many of the world's top 'real-world' companies launching OUSD, I don't see a route for Circle to continue growing market share. In fact, the total outstanding amount of USDC may end up declining in the coming years as wide distribution from hyper-legitimate backers, including Visa ( V ), Mastercard ( MA ), American Express ( AXP ), BlackRock ( BLK ), and Coinbase ( COIN ), drives OUSD to the top spot - at CRCL's expense. If you adjust analyst growth estimates for this new potential future, Circle's current valuation no longer makes any sense, which is why the stock fell ~18% yesterday. I expect that there's more where that came from and see considerable downside room for shares in the coming years as OUSD strips away Circle's growth opportunity. As such, I'm double-downgrading CRCL to a sell rating. Let's dive in. Circle's Current Business As I've written about before, and as I'll briefly summarize here, Circle, on the face of it, is an incredibly attractive business. The company mints stablecoins out of thin air when users deposit collateral, typically in the form of fiat USD (although Circle has a number of other smaller stablecoin products, including EURC), and from there it earns interest on those deposits while users gain access to digital currency that they can deploy throughout the broader crypto ecosystem. In years' past, Circle has relied on a combination of promotion and tooling efforts to increase adoption of USDC, efforts that have largely been successful. Promotion through its distribution partner, Coinbase, has led to significant retail adoption of the token, and cross-chain tooling, including the Circle Payments Network, Circle Gateway, CCTP, etc., have broadened USDC use cases among commercial customers. As such, we've seen an explosion in USDC issued, almost directly correlating with the company's increasing revenues. From here, the company has historically had a mix of macro trends to contend with. In recent years, interest rates have been moving lower, which means the company has earned less interest on its core asset base. This is a relatively unavoidable phenomenon of the business, but it puts pressure on revenues. On the reverse side, the explosion of AI agents is expected to bring a significant boon to the company, given that agent commerce will likely choose 'lowest-cost' payment rails, which tend to be stablecoins, for retail purchases and other services. If agentic commerce really takes off, it could act as a serious boon for the amount of circulating USDC, which directly translates to new growth. When I covered the stock a few months ago, this was the setup, and I viewed shares at the time, which were trading at a premium (but not unreasonable) valuation as a 'Strong Buy'. Now, however, the tables have turned with the announcement of OUSD. What OUSD Is Announced yesterday , OUSD is a stablecoin that is expected to launch later this year and is backed by a consortium of financial and retail players from across the global economy: OUSD Announcement (Thank goodness they got freedom bank Kazakhstan!) A significant number of banks have joined the consortium, although critically for me, the addition of Mastercard, Visa, and American Express within the group highlights that the agentic business opportunity for Circle may one day instead flow over OUSD rails, given the distribution advantages of those three card networks. On top of that, asset managers like BlackRock back the project, along with the premier centralized crypto exchange Coinbase , which up until now has served as one of Circle's lead distribution partners. Coinbase's involvement in this new consortium raises questions about its commitment to the Circle partnership, which is up for renewal in August. Overall, though, it can hardly be read as anything but a bad thing, given the broader competitive dynamics at play. Circle currently has a significant market share that it shares with competitor Tether, but given the financial heft and distribution of the companies that underlie the OUSD consortium, I expect that the new stablecoin will see rapid adoption and take market share away from Circle. While the crypto ecosystem is growing in general, it ebbs and flows like any other market, and currently, for the most part, it still acts as a relatively fixed-sum pie. As such, OUSD's gains will directly become Circle's losses, as its reserve asset base gets smaller, less new USDC is minted, and new payment volume chooses OUSD. This will have significant consequences for Circle's business model. Financials & Valuation As I'm sitting here writing this, analysts have not yet updated their forecasts for Circle's growth trajectory, and right now the consensus sits at roughly 14% revenue growth this year, 36% revenue growth next year, and 29% revenue growth in 2028: Author Calculation & FMP Data I anticipate a significant flattening of this curve given this new competition vector, and expect revenue growth of 10% this year, 12% next year, and 10%, 6%, and 8% to the end of the decade: Author Calculation & FMP Data Again, the significant kneecapping of growth estimates comes down to just how credible and rapid OUSD's adoption will likely come soon after it launches. This also has significant implications for profitability as Circle competes for market share. Analysts currently expect net income margins of 7%, 10%, and 13% over the next three years, growing as Circle is able to improve economics and reduce promotional costs after reaching critical mass: Author Calculation & FMP Data Now, however, I'm anticipating relatively flat net margins in the 7 to 10% range through the end of the decade, with no real material growth, as it fights to maintain share in the broader crypto system against this new competitor: Author Calculation & FMP Data To be honest, I'd even argue that these positive margins could be overly optimistic from me, given how existential this threat is. These new estimates will likely also impact the valuation. As we all know, growth and valuation form a virtuous cycle on the way up and a vicious cycle on the way down. That is, when growth estimates are high and improving, the valuation also expands, creating a one-two punch effect for investors. On the reverse side, a lack of growth or slowing growth can often lead to multiples re-rating lower, causing a rapid share price decline, akin to the move we saw yesterday. All told, I expect that Circle will be able to command a steady-state price-to-earnings multiple of roughly 25x over the next few years, as it faces competition in a growing sector against an adversary with considerably more financial credibility and distribution. If you apply that valuation schema to the financial estimates I introduced earlier, you're looking at an incredibly uninteresting total returns profile, roughly -10% annually to the end of the decade: Author Calculation & FMP Data This model doesn't even bake in dilution, which could also act as a headwind. The thing is, even if these estimates are off by 10% either way, whether you're looking at the financials or the valuation, you're still looking at an incredibly uninteresting place to allocate capital now that Circle faces significant competition in its core business line: Author Calculation & FMP Data As such, it is difficult to rate the stock as anything other than a 'Sell'. How I'm Wrong I see a few ways that a position in Circle could work out over the next five years, and I'll walk you through those points now. First off, I may be underrating the quality and strength of Circle's current network within the broader crypto ecosystem. USDC has become the go-to reserve asset on a number of chains and a number of centralized and decentralized applications, giving it significant credibility and reach. This hasn't happened overnight, and the company has spent hundreds of millions of dollars building its position. That said, I've seen the crypto ecosystem move fast as dynamics change, and I don't think it will take long for OUSD to become prominently featured within top and niche apps alike. At the same time, Coinbase being involved in this consortium doesn't mean that it's necessarily changed sides, and if Circle is able to extract good terms from Coinbase upon contract renewal in August, then that could act as a positive catalyst for the stock price. Finally, it's possible the crypto ecosystem grows quickly enough to offset the market share losses from OUSD, making Circle a faster-than-expected growth opportunity. Summary Overall, though, I see these outcomes as relatively low probability, which is what's driving my current thesis. At the end of the day, Circle was in a great position a few months ago, but things have worsened considerably as a result of this new market entrant that already has scale, reach, and credibility from day one. As such, I rate the stock a Sell. I'll be taking losses on my position at the current market price. Cheers~