- Morgan Stanley downgraded Circle to Underweight, cutting its price target by 64% to $38 from $106.
- USDC supply forecasts were slashed by 33% for 2027 and 44% for 2028, pushing EPS estimates below consensus.
- Competition from tokenized money market funds and Open USD threatens Circle's reserve income model.
- TD Cowen initiated coverage with a Buy rating and $82 target, citing growth in fee-based revenue.
Circle Internet Group (CRCL) took a hit on Monday after Morgan Stanley issued a stark downgrade, moving the stock from Equal Weight to Underweight and slashing its price target by nearly two-thirds to $38. The move reflects a deepening concern over the stablecoin issuer’s core revenue engine, as USDC’s circulating supply faces structural pressures from multiple directions. The stock dropped around 6% in pre-market trading, adding to a year-to-date decline of roughly 30%.
The downgrade isn’t just about a single quarter’s performance. Analyst James Faucette pointed to a weaker long-term earnings outlook driven by slower USDC growth, mounting competition from tokenized money market funds, and a pivot toward lower-margin transaction revenue. Morgan Stanley reduced its USDC supply forecasts by 33% for 2027 and 44% for 2028, leading to GAAP EPS estimates that are 3% below consensus for 2027 and 20% below for 2028. The bank’s note highlighted that USDC contraction exposes reserve income sensitivity, a critical issue since reserve income remains Circle’s primary revenue source.
Why the Bear Case Is Gaining Traction
Morgan Stanley’s bearish thesis rests on three structural headwinds. First, tokenized money market funds are cannibalizing stablecoin balances. BlackRock recently launched two new blockchain-based products—BSTBL and BRSRV—designed to qualify as eligible reserve assets under the GENIUS Act. These products allow institutional holders to earn Treasury yields on-chain without going through USDC, directly competing for the capital that would otherwise sit in Circle’s stablecoin. BlackRock already manages $60 billion of Circle’s reserves, and its CFO stated the firm wants to be “the stablecoin reserve manager of choice.”
Second, the rise of Open USD (OUSD) threatens Circle’s distribution economics. OUSD is a rival stablecoin that redistributes nearly all reserve income to its 140 distribution partners, rather than retaining it as issuer income. This model makes it structurally more expensive for Circle to defend its distribution incentives. Morgan Stanley noted that OUSD “embeds shared governance and reserve economics, raising the cost of defending USDC distribution.” The stock fell 17.5% the day OUSD was announced in June.
Third, Circle’s agentic payments platform has failed to gain meaningful traction. Despite the company’s positioning as an AI-native payment infrastructure provider, daily transaction volume on the platform has dropped to approximately $41,900, with an average transaction size of just $0.24. Morgan Stanley described the segment as “immaterial” to Circle’s financial picture, undermining a key growth narrative.
Competing Views on Wall Street
Not all analysts agree with the bearish outlook. On the same morning, TD Cowen initiated coverage of Circle with a Buy rating and an $82 price target, implying roughly 31% upside from Friday’s close. Analyst Bryan Bergin argued that the market is underestimating Circle’s evolution into a platform player. He cited trailing twelve-month revenue of $2.86 billion, up 51% year over year, and pointed to fee-based products like Circle Payments Network, Cross-Chain Transfer Protocol, and USYC tokenized money market fund as compounding growth drivers. TD Cowen projects USDC circulation compound annual growth of 31% through 2030.
The $44 gap between Morgan Stanley’s $38 and TD Cowen’s $82 reflects a fundamental disagreement about Circle’s future. The bear case sees a reserve-income issuer being squeezed by competition and margin compression, while the bull case sees a financial infrastructure platform whose revenue mix is diversifying beyond stablecoin issuance. JPMorgan has also flagged concerns, noting that the revised revenue-sharing deal with Hyperliquid creates a “prisoner’s dilemma” where both companies are forced to offer better terms to large distribution partners, reducing combined earnings by $60–80 million annually.
Regulatory and Macro Pressures
The downgrade comes amid broader crypto market weakness, with Bitcoin slipping below $63,000 and losing about 28% of its value in 2026. The CLARITY Act, a comprehensive crypto market-structure bill, has not appeared on the Senate’s calendar this week, raising uncertainty about regulatory clarity. Bernstein warned that a failure to advance the bill could trigger another leg lower for crypto markets. Circle’s OCC national trust charter provides some regulatory advantages, but the legislative uncertainty adds another layer of risk for the standalone stablecoin issuer.
Circle’s revenue model is also sensitive to interest rates. As the Federal Reserve signals potential rate cuts, reserve income per dollar of USDC declines. Morgan Stanley’s 2028 EPS estimates, 20% below consensus, likely incorporate this rate sensitivity. Tether, with a much lower cost structure, can weather lower rates better, but Circle’s public company costs and preferred stock dividends make it more vulnerable.
What to Watch in Q2 Earnings
Circle is set to report second-quarter 2026 earnings on Wednesday, August 5. Wall Street expects GAAP EPS of $0.16 on revenue of $713.7 million. The key metrics to watch include USDC supply trends, the revenue-less-distribution-cost margin (which hit 41% in Q1), agentic payment volume, and any commentary on the Coinbase commercial agreement renewal scheduled for August 18. Management’s response to the Morgan Stanley note will be critical in shaping investor sentiment.
Ultimately, the downgrade highlights a broader reckoning for the stablecoin business model. As tokenized alternatives proliferate and distribution costs rise, Circle’s ability to defend its economics will determine whether the stock finds a floor or continues to slide. The $38 price target may not be the end of the re-rating if the structural headwinds prove persistent.
