JP Morgan Initiates Circle Coverage with Underweight Rating Citing Overvaluation

JP Morgan analysts have initiated coverage of Circle with an “Underweight” rating, citing concerns over the company's valuation following its initial public offering. The analysts expressed confidence in Circle's management team and the growth prospects for stablecoins and USDC. However, they noted that Circle's current market capitalization is elevated, suggesting that the stock has become overvalued.

JP Morgan analysts set a price target of $80 per share for Circle by the end of 2026. This valuation is based on a price-to-earnings ratio of 45x, which is in line with peers like Robinhood. The price target also includes a $10 premium to account for current investor enthusiasm for stablecoins and USDC. Circle shares were trading at approximately $186.50 on Monday, reflecting a more than 3% increase. The stock had previously soared as high as $299 since its NYSE debut.

Circle's business model is highly sensitive to interest rates, with over 95% of its revenues tied to reserves such as cash and U.S. Treasuries. Lower interest rates could negatively impact Circle's profitability, but if interest rates remain higher for an extended period, the company could outperform. Additionally, with stablecoin legislation progressing on Capitol Hill, Circle may face stiff competition from major banks and consumer retailers introducing their own stablecoins. However, Circle's stablecoin and network for issuing USDC have interoperability features that competitors may struggle to replicate.

Unlike tokenized money-market funds, Circle's USDC does not offer investors a yield. If tokenized money-market funds start gaining market share from stablecoins, this could limit USDC's future growth. Stablecoin legislation could help USDC take market share from Tether’s USDT, the industry’s leading stablecoin, by forcing Tether to adapt its token to comply with new rules. USDC has a more compliant and trusted brand that could attract conservative Wall Street firms. However, if the legislation includes higher capital requirements, it could restrict USDC growth.

The analysts also noted that the adoption of a central bank digital currency (CBDC) by regions like the EU could negatively affect USDC's ability to scale globally. Despite these challenges, the analysts believe that Circle could outperform in the long run if stablecoin adoption in the U.S. happens faster than expected or if stablecoins' use in cross-border and consumer payments surges. The bank is also debuting its own tokenized deposit accounts, which could further support stablecoin adoption.

Overall, the analysts see the passage of stablecoin regulation as a potential catalyst for stablecoin adoption in the U.S. and abroad, positioning USDC as a winner in this evolving landscape.