Goldman Sachs also poured cold water on Circle: the valuation is too high, and three factors are putting pressure on profit margins, but cross-border payments may be a breakthrough point

Following JP Morgan's target price of $80, Goldman Sachs has also taken a bearish stance on Circle, stating that while it has unique value, its valuation is too high and profit margins face multiple pressures.

According to Wind Trading Desk, Goldman Sachs has initiated coverage of the stablecoin issuer Circle with a neutral rating and a target price of $83, based on a 60 times adjusted price-to-earnings ratio for Q5-Q8, indicating a potential downside of 54% from the current stock price.

Goldman Sachs analysts believe that Circle, as the issuer of the USDC stablecoin, holds a unique position in the public market as the only purely crypto-native company, expected to benefit from the expansion of the existing fiat currency market without directly bearing the price volatility of cryptocurrency trading. The company anticipates a 40% compound annual growth rate in USDC supply from 2024 to 2027, along with 26% and 37% growth rates in revenue and adjusted earnings per share, respectively.

However, the current forward price-to-earnings ratio of about 145 times is significantly higher than the industry average of about 35 times, leading Goldman Sachs to maintain a cautious stance despite the strong business outlook. At the same time, Goldman Sachs pointed out three potential factors that could pressure profitability: interest rate cuts, USDC being diverted to yield-bearing products, and rising distribution costs.

Additionally, Goldman Sachs noted that dollar stablecoins are seeking to explore new growth areas beyond cryptocurrency trading, with cross-border payments and fiat currency trading markets being the most disruptive potential fields. Goldman Sachs estimates that the revenue pool for the cross-border payment market is about $30 billion to $50 billion, but Circle's Cross-Border Payment Network (CPN) is still in its early stages and has not yet addressed core pain points such as foreign exchange conversion.

Unique Market Position Supports Robust Growth

As the issuer of the second-largest stablecoin USDC, Circle has a market capitalization of $40 billion, accounting for 25% of the stablecoin market share. The primary use of USDC is as a key component of the cryptocurrency market infrastructure, facilitating payments and serving as collateral for transactions.

Goldman Sachs predicts that USDC will grow by $77 billion from 2024 to 2027, driven mainly by: a $30 billion share increase on the Binance platform, a $15 billion share increase 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 dollars without entering new total addressable markets.

The partnership with Binance presents significant opportunities. Since establishing a partnership with Binance in December 2024, the USDC balance on the Binance platform has increased by $6 billion, with USDC's share among stablecoins on Binance rising from 9% to 23%. It is expected to gain $30 billion in USDC share growth from the Binance platform from 2024 to 2027.

Furthermore, Goldman Sachs believes that regulatory compliance advantages will drive market share growth. USDC adopts a highly compliant approach, aligning with current EU stablecoin regulatory requirements and pending stablecoin legislation in the U.S., providing strong support for its continued market share growth. It is expected to gain an additional $15 billion in market share from competitors like USDT

Reasons for Bearish Outlook on Stock Price: Overvaluation and Three Major Factors Pressuring Profit Margins

Despite Circle's solid business fundamentals and promising growth prospects, Goldman Sachs' bearish stance primarily focuses on overvaluation and multiple downside risks.

Valuation Severely Diverges from Fundamentals: Circle's current forward adjusted price-to-earnings ratio of 145 times far exceeds the industry average of 35 times. Even considering its 26%/37% compound annual growth rates in revenue and net profit, which outperform the industry averages of 11%/7%, such a significant valuation premium remains difficult to justify. Goldman Sachs' target price of $83 is based on a 60 times price-to-earnings ratio, which, while higher than the industry's highest level, still implies a 54% downside potential.

Interest Rate Cuts: Circle's business is highly dependent on the interest rate environment, with the yield on reserve assets closely tied to the federal funds rate. Goldman Sachs estimates that a 25 basis point rate cut would lead to approximately a 5.5% revenue impact and a 10.5% adjusted earnings per share impact. The market currently anticipates five rate cuts in 2025-26, which would significantly pressure Circle's profitability.

USDC Being Diverted to Yield-Producing Products: Since USDC does not pay interest to holders, customers may gradually shift towards yield-generating alternatives, such as tokenized money market funds. This substitution threat could lead to a loss of market share for USDC, thereby affecting Circle's revenue growth.

Rising Distribution Cost Pressure: To maintain ecosystem growth, Circle needs to continue increasing incentive spending for partners. Currently, Circle allocates about 61% of its reserve income to partners, and as competition intensifies, this proportion may further increase, squeezing net income margins.

Cross-Border Transfers May Become Breakthrough Point

The stablecoin USDC is eyeing significant market opportunities beyond cryptocurrency trading. Goldman Sachs estimates its potential market size in payment infrastructure and fiat currency transactions could reach hundreds of billions of dollars, but these applications are still in the validation 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 approximately $30 billion to $50 billion, with high transaction costs and complex, inefficient infrastructure, providing an entry point for stablecoins.

Circle has launched the first phase of its cross-border payment network CPN, but the platform only completed its first transaction in mid-May and has yet to address the core pain points of cross-border payments, including "last mile" delivery and foreign exchange conversion.

The overall payment infrastructure market is even larger, with valuations ranging from $160 billion to $280 billion, but analysts believe it will take years to gain market share in this mature and efficient market