Circle Internet Shares Drop Following Morgan Stanley Downgrade

Circle Internet's stock experienced a decline after Morgan Stanley revised its rating to underweight and significantly reduced its price target from $106 to $38. This downgrade stems from concerns regarding the company's long-term earnings potential.

Concerns Over USDC Growth and Competition

The downgrade led to a 6% drop in Circle's stock price, which has already seen a 30% decrease this year. The main issue highlighted by Morgan Stanley is the anticipated slowdown in growth for USDC, the company’s principal dollar-pegged stablecoin that significantly contributes to its revenue.

Analyst James Faucette noted that the firm's projections for USDC supply have been cut by approximately 33% for 2027 and 44% for 2028, which has implications for earnings-per-share estimates that fall below Wall Street's consensus by 3% in 2027 and 20% in 2028.

Faucette elaborated, "We downgrade Circle, as USDC contraction exposes reserve income sensitivity and points to a lower-margin shift toward transaction revenue." He pointed out that the company is likely to face pressure on its earnings due to increasing competition from new tokenized cash products and alternative stablecoin models.

Highlighting the competitive landscape, Morgan Stanley mentioned BlackRock's recent introduction of two tokenized money market products aimed at both traditional investors and the burgeoning stablecoin market. This move is seen as an effort that could affect USDC balances and the earnings Circle derives from its reserves.

Additionally, the bank expressed skepticism about Circle's expansion into agentic payments, indicating that transaction volumes have dwindled to an average of about $41,900 daily, with an average transaction size of around 24 cents, which suggests limited market adoption.

The stablecoin sector is becoming increasingly crowded, particularly with the emergence of Open USD, a new stablecoin model characterized by shared governance and reserve economics. Morgan Stanley warned that this structure could impose higher costs for Circle in maintaining USDC distribution incentives.

This negative outlook from Morgan Stanley follows a similar downgrade from JPMorgan, which indicated that Circle's revised agreement with crypto exchange Hyperliquid has compromised the economics of USDC, underscoring a competitive dilemma between Circle and Coinbase regarding USDC distribution that may come at the expense of profitability.