Summary Despite Circle's revenue beat in Q2, my previous bull thesis seems to be broken. Shrinking profitability, a huge EPS miss, and declining margin guidance signal significant trouble ahead. The primary growth engine, USDC circulation, missed consensus estimates for the first time, challenging the narrative of frictionless, explosive growth for the company. Insider-heavy secondary offering post-earnings signals lack of confidence, with 80% of shares sold by existing holders, pressuring the stock. My operating leverage thesis might have vanished. Costly revenue-sharing deals with partners are eroding profitability and clouding the company's future earnings visibility. With profitability and growth momentum now in question, future earnings estimates are at high risk, making the stock's current valuation look extremely precarious. Intro & Thesis In my previous and only article on Circle Internet Group ( CRCL ) stock, which was published last month, I argued that Circle wasn't just a crypto company - it looked like a strong stablecoin pure play, which was profitable, and whose financials looked quite strong to justify the forward valuation multiples. The firm recently released its Q2 FY2025 earnings, and while they managed to beat the top-line revenue estimates, I don't like the fact that they missed on the key USDC circulation metric. In addition to that, just a few hours ago, the news broke that Circle is running a new public offering with massive insider selling, which is not a good sign, in my view. I decided to downgrade the stock to "Hold", waiting for the building pressure following the offering and probably a series of earnings estimates revisions. Why Am I Downgrading? At first glance, it looks like CRCL's Q2 print came stronger than expected, with total revenue of $658 million beating the $644.7 million consensus, but because of the IPO they held in June, and the subsequent SBC non-cash expenses, CRCL's GAAP EPS amounted to -$4.48, and it came in at a much lower figure than expected (the consensus was $0.34). We know that growth firms can miss because of SBC-related expenses with no market reaction, as most market participants understand the temporariness of such misses. But in this case, the SBC expense was close to $435 million, and the firm's net loss was at ~$482 million, which means that the profitability is kind of shrinking even without the SBC drag. So, one of the theses that I had in July - Circle's status as a unique profitable crypto play - isn't there anymore (at least for now). The management shared some guidance metrics to focus on, and we still see that ~40% CAGR for "USDC in Circulation", with RLDC margin at ~37%. If they do reach it, this will mark a decline from the 40% margin we saw in Q1 2025 (and from the 42% in the same quarter last year). Seeking Alpha, CRCL My July bullish thesis has weakened amid this expectation, as the "powerful operating leverage" I was referring to has vanished. Circle's high costs of partnering with distributors like Coinbase ( COIN ), and now others like Bybit, are clearly eating into profitability, and it can't help but raise questions regarding its future EPS visibility, in my opinion. The company's largest expense is revenue sharing with Coinbase, where Circle splits earnings on USDC held on the exchange. This arrangement means Circle's profits decrease as more of its $61 billion in circulating USDC gets stored on Coinbase rather than other platforms. This dynamic illustrates a common challenge for fintech companies: dependence on key distribution partners can create structural margin constraints that persist even as the business scales successfully. Source: Tech in Asia Also, it's hard to ignore the fact that the primary engine of Circle's growth - USDC in circulation - showed signs of a slowdown, because although this metric was up by 90% on a YoY basis, it actually fell short of the consensus expectations (albeit by What I couldn't pass by was the event that CRCL launched a new offering, selling 10 million shares, with 80% of those shares coming from the stockholders, according to Seeking Alpha News: Seeking Alpha News There's no problem in selling shares for future expansion, but in this case, when 80% of the offering is coming from the earlier investors, it looks like a sign of them simply cashing out. The timing looks weird as well - the Q2 earnings release had been published just a few hours before that new offering announcement. It's unsurprising to me that the stock is falling by over 6% after-hours (see the screenshot above) - an offering where insiders are selling four times as many shares as the company is raising sends a clear signal about their view on the stock's current valuation. By the way, speaking of the stock's valuation, it's hard to see the analysts' factual reaction on Q2, as there's no earnings revisions made just yet (all recent IPOs lack the timing on this kind of thing). Anyway, we still see that the consensus suggests a continued YoY expansion in EPS for quarters to come as the firm's revenue follows the "USDC in circulation" metric's growth. Seeking Alpha, CRCL's EPS revisions With the drag on Circle's profitability, which I think might continue further, there's a chance that Circle's EPS consensus figures get adjusted sooner or later. I'm cautious about how it can press the valuation multiple, although the FY2026-2027 ratios look reasonable to me. Seeking Alpha, CRCL's revenue forecasts On a positive note, I should say that Circle is still very likely to experience superior top-line growth rates in the next few years, thanks to the passage of the GENIUS Act in July, which brought in the much-needed regulatory clarity for the stablecoin industry. The question is, "How high can the margins stay?", with all those new revenue-sharing agreements between Circle and crypto players. The Bottom Line Overall, I can't say that I was impressed by the company's beat on the top line this quarter: While it's always great to see a beat, the post-IPO drag couldn't fully explain the massive EPS miss, and it seems to be masking the real reasons behind that miss. Among the main reasons, I see Circle's inability to maintain high margins with all those revenue-sharing partnerships. In addition to that, the new offering announced just a few hours ago came in as a bitter pill to anyone who bought the stock after its IPO. While I don't want to belittle the firm's future potential in revenue expansion and its prominent place in the stablecoin industry in the years to come, I believe the consensus estimates regarding its forward EPS figures can be hit hard. The FWD valuation looks reasonable as of today, but again, with lower growth rates in the future, the stock price can stay under pressure for longer. I'm downgrading the stock to "Hold". Probably you have a different opinion about Circle; please, let me know in the comments section below. Thank you for reading!
