Mizuho Downgrades Circle to Underperform Amid Open USD Competition

Mizuho Downgrades Circle Amid Competitive Pressures

Japanese investment bank Mizuho has downgraded Circle to an underperform rating, down from neutral, and reduced its price target from $85 to $50. This decision comes as Open USD, a new dollar-backed stablecoin introduced by the Open Standard consortium, poses potential threats to Circle’s business model.

Impact of Open USD on Circle’s Economics

In a report led by analyst Dan Dolev, Mizuho indicated that Open USD’s yield pass-through model could exert pressure on Circle’s profit margins. This model is designed to shift more reserve income to distributors, which could jeopardize Circle’s ability to maintain extensive reserves for operational income.

Circle’s stock was trading down 0.6% at $62.63 at the time of the report. Analysts noted that the business model differences between Circle’s USDC and Open USD could significantly affect Circle’s long-term revenue structure. Open USD, which launched on June 30 and boasts over 140 partners, including major players like Mastercard, Stripe, Coinbase, and BlackRock, could shift industry dynamics markedly.

Declining Interest and Competitive Landscape

Circle has seen a decline in its USDC supply, dropping to approximately $73 billion from nearly $80 billion since March. The overall market for stablecoins has contracted by around $10 billion due to decreased trading activity and intensified competition from newly regulated issuers.

While Circle traditionally retains the majority of its treasury yield revenue before sharing with partners like Coinbase and Binance, Open USD’s approach involves charging a minimal operational fee and distributing most reserve income among distributors and issuers.

Negotiation Challenges Ahead

Mizuho’s analysts point out that this competitive model may lead partners of Circle to demand a larger share of the reserve income, particularly as Circle approaches negotiations with Coinbase regarding their revenue-sharing agreement, scheduled for August. Any support Coinbase lends to Open USD could fortify its bargaining position in these discussions.

Revised Financial Expectations

Reflecting these competitive risks, Mizuho adjusted its cost estimates for Circle significantly, estimating distribution and transaction costs rising to 73% from an earlier 64%. The adjusted EBITDA forecast has been lowered to $699 million, a substantial reduction from the previous estimate of $1.09 billion and below the analyst consensus of $941 million.

Wider Market Pressures

The headwinds facing Circle are compounded by external factors. A recent report from JPMorgan highlighted that the newly announced partnership between Hyperliquid, Circle, and Coinbase poses risks to the economics surrounding Circle’s USDC.