Circle Internet Group is coming around for another shot at an initial public offering

The issuer of USD Coin, a digital token pegged to the value of the U.S. dollar, is nearing a listing after nixing a blank-check

Circle Internet Group, the issuer of USD Coin, is preparing for a second attempt at initial public offering as it seeks to capitalize on the burgeoning cryptocurrency industry. The company, which is a key player in the rapidly expanding realm of stablecoins, is nearing a listing after cancelling a blank-check merger last year.

Circle Internet Group, the issuer of USD Coin, is preparing for a second attempt at initial public offering as it seeks to capitalize on the burgeoning cryptocurrency industry. The company, which is a key player in the rapidly expanding realm of stablecoins, is nearing a listing after cancelling a blank-check merger last year.

As Congress edges closer to enacting legislation to regulate these digital assets, the timing appears optimal. Economists at Citi estimate that stablecoins, which are pegged to the U.S. dollar and serve as a bridge between crypto and regular money, might reach $1.6 trillion in value by 2030. These coins are also envisioned as a means of sending cash around the globe and an alternative to volatile local currencies.

The importance of disclosing the assets backing the coins and ensuring their liquidity to guarantee convertibility into dollars has been highlighted by researchers at the Stanford Graduate School of Business. This aspect is crucial for gaining user acceptance. In this regard, Circle's focus on transparent accounting and its partnership with Mastercard, which will offer USDC to its users for payments, are noteworthy. However, newer entrants like Circle will likely take time to build the same level of trust as Visa and Mastercard, which have been operating for decades.

Currently, USDC and Tether account for nearly all stablecoin transactions, according to Visa. Among the major cryptocurrency payment processors, Circle, headed by Jeremy Allaire, claims a greater share of transactions than Coinbase Global, according to a report by the Federal Reserve Bank of Boston.

Despite the promising narrative, Circle's revenue model and performance might not quite align with the company's optimistic outlook.

Despite the promising narrative, Circle's revenue model and performance might not quite align with the company's optimistic outlook.

The company's primary revenue stream, accounting for 96% of the total, is interest income earned on the reserves backing USDC. This revenue soared by 88% year-over-year to $1.4 billion in 2024 as the rate of return on its reserve assets reached as high as 5.19%. In contrast, at the beginning of 2022, the rate of return on these assets was a mere 0.14%. This substantial increase can be attributed to the rapid rise in the Federal Reserve's benchmark rate over the past year and a half, which in turn led to a significant increase in yields on U.S. Treasury bills, the preferred reserve asset for major stablecoin issuers. However, this growth has slowed, with revenue rising by only 16% in 2024 as Treasury yields stabilized following the Fed's rate cuts.

This reliance on a single revenue source might leave Circle's earnings perilously hostage to fortune. To diversify its revenue streams, Circle could aim to get more institutions like Visa to accept USDC for remittances or business payments. Despite its rapid growth, Circle pays a hefty price for it, with some 54% of its 2024 revenue going to partner Coinbase for distributing its coin. This partnership, which began in 2020, has been crucial for USDC's adoption among crypto traders.

In comparison, Visa and Mastercard, which boast a broader footprint and an established brand, reported EBITDA margins roughly quadruple Circle's 17% last year. Nevertheless, if we consider Mastercard's valuation multiple of 30 times, which is typical for large-cap equities, and apply it to Circle's 2024 EBITDA of $284 million, we arrive at a valuation of $8.5 billion. This broader perspective aligns with the narrative Circle highlights in its filings.

However, given the company's narrow revenue base, present reality would seem to demand a steeper discount. According to Bloomberg, which cited people familiar with the matter, crypto firm Ripple offered to acquire Circle for between $4 billion and $5 billion. The company says it isn't for sale.

An exit to a strategic buyer could help to mitigate the steep cost of distribution. As institutions like Visa and Mastercard enter the cryptocurrency space, they might prefer to acquire an established stablecoin company like Circle or Tether, which is also a major issuer. This move would allow them to quickly integrate into the crypto ecosystem and capitalize on the growing demand for digital assets.

Moreover, considering that both Visa and Mastercard are currently valued at multiples of 40 times their 2024 earnings, acquiring Circle at a lower multiple would be more appealing.

With institutions like payment provider Stripe acquiring stablecoin platform Bridge in February and legislators advancing a bill to regulate stablecoins, the momentum and regulatory acceptance are building.

With institutions like payment provider Stripe acquiring stablecoin platform Bridge in February and legislators advancing a bill to regulate stablecoins, the momentum and regulatory acceptance are building.

As this momentum continues, Circle will undoubtedly prove valuable, especially as it pivots towards offering a broader range of services like cross-border payments and integration with institutions like Visa and Mastercard. However, in the big picture, it could be even more valuable as part of a bigger platform.