Circle's IPO is questioned again: Valuation almost halved, a desperate attempt to cash out under pressure of profits?

After years of unsuccessful preparations for an IPO, Circle recently submitted an application to the SEC to list on the New York Stock Exchange. However, the valuation was nearly halved, revenue was highly dependent on U.S. bonds, and high commissions eroded profits, which also raised questions about Circle's business prospects.

After years of unsuccessful preparations for an IPO, Circle, the issuer of the stablecoin USDC, recently submitted an application to the SEC to list on the New York Stock Exchange. However, the valuation was nearly halved, revenue was highly dependent on U.S. bonds, and high commissions eroded profits, which also raised questions about Circle's business prospects.

The valuation was almost halved, and the equity was sold to Coinbase in exchange for the full issuance rights of USDC

The day before the U.S. House of Representatives planned to amend and vote on the stablecoin regulatory bill GENIUS Act, the U.S. SEC website document showed that Circle submitted an S-1 document to the SEC, intending to conduct an initial public offering with the stock code "CRCL" and apply for listing on the New York Stock Exchange. At the same time, Circle has hired JPMorgan Chase and Citibank to assist in its IPO. These two institutions were also members of the financial advisory team for Coinbase's IPO.

However, Circle did not disclose in detail the specific number of shares issued and the target price range in this prospectus. But Circle's valuation has changed several times with the market environment and its own scale, from $4.5 billion in the SPAC merger transaction in 2021, to $9 billion after the revision of the merger agreement in 2022, and then to a secondary market transaction valuation of about $5 billion in 2024. According to Forbes, in this traditional IPO plan, Circle's target valuation is between $4 billion and $5 billion, which has shrunk by nearly half from its peak.

Circle has completely controlled the issuance of USDC before the IPO. According to The Block, Circle acquired the remaining 50% of Centre Consortium's equity, which was previously held by Coinbase, for $210 million worth of stock in 2023. Centre Consortium is a joint venture responsible for issuing USDC stablecoins, jointly established by Coinbase and Circle in 2018.

Circle disclosed in the "Major Transactions" section of the prospectus that "In August 2023, at the same time as the signing of the cooperation agreement, we acquired the remaining 50% equity of Centre Consortium LLC from Coinbase." The transaction consideration was paid with approximately 8.4 million shares of Circle common stock (a total of US$209.9 million at fair value). After the acquisition, Centre became a wholly-owned subsidiary of Circle and was dissolved in December 2023, with its net assets transferred to another wholly-owned subsidiary of Circle. Coinbase also disclosed that it obtained Circle equity through an agreement grant rather than a cash purchase. This also means that Circle uses company shares in exchange for full control of USDC, and this transaction will not directly affect Circle's cash flow.

In fact, Circle began preparing for an IPO as early as 2021, and had reached a merger agreement with SPAC company Concord Acquisition, planning to go public through the SPAC route, but the transaction was postponed due to failure to obtain SEC approval and was eventually announced to be terminated at the end of 2022. In January 2024, Circle once again revealed that it had secretly submitted an IPO application and said that it would proceed after the SEC completed the review process.

Compared with previous attempts, the background of this application has changed significantly: the scale of the stablecoin market has achieved a qualitative leap, with strong growth momentum, and the influence of stablecoins including USDC in global finance continues to increase; at the same time, the United States has a positive attitude towards compliant stablecoins, creating more development space for the development of the stablecoin track, including giants such as JPMorgan Chase, PayPal, Visa, Fidelity and Ripple are all laying out stablecoins, and the Trump family project WLFI also plans to promote stablecoins. At the same time, as the US crypto regulatory policy becomes clearer, crypto companies such as Kraken, eToro, Gemini and CoreWeave are seeking IPOs.

Revenue is highly dependent on US bonds, and Coinbase's high commission eats up profits

However, Circle's IPO prospects are facing multiple doubts, and its core business model and profitability have caused heated discussions in the market.

First, Circle's revenue is highly dependent on US Treasury yields, and this model is in jeopardy under the expectation of a Fed rate cut. According to the IPO documents, Circle's total revenue in 2024 was $1.676 billion, and the revenue growth mainly came from reserve income, that is, interest income generated by USDC reserves, accounting for more than 99% of total revenue, and this part of interest income mainly comes from US Treasury bonds. In a sense, Circle's revenue model is like a US Treasury arbitrage game.

Secondly, high distribution costs further erode Circle's profits. Circle's net profit in 2024 was $155.67 million, down 41.8% from 2023. Behind this decline in numbers is a sharp increase in distribution and transaction costs. In 2024, Circle spent a total of $1.0108 billion, accounting for 60.7% of total revenue, an increase of 40.4% from 2023. Among them, Coinbase is the main distribution platform for USDC. According to Coinbase's previous financial report, Coinbase earned $225.9 million from USDC in Q4 of 2024 alone, and is expected to earn about $900 million for the whole year. This means that Circle is spending more money to maintain the circulation of the USDC ecosystem, but revenue growth has not kept pace.

In fact, according to the S-1 listing document, Coinbase, as its core partner, can obtain a 50% share of the remaining income of the USDC stablecoin reserve. Coinbase's share is directly linked to the number of USDC held by its exchange. The document points out that when the USDC hosted by the Coinbase platform increases, its share will increase accordingly; otherwise, it will decrease. In 2024, the proportion of USDC held by the Coinbase platform has increased significantly from 5% in 2022 to 20%.

Matthew Sigel, head of digital asset research at VanEck, said that despite the overall revenue growth, Circle's sharp increase in distribution and trading costs has had a negative impact on its EBITDA (earnings before interest, taxes, depreciation and amortization) and net profit. Circle also warned that Coinbase's business strategy and policies directly affect USDC's distribution costs and revenue sharing, and Circle cannot control or regulate Coinbase's decisions.

However, in order to reduce its dependence on Coinbase, Circle has also been vigorously expanding its global partners in recent years, including establishing cooperation with global digital financial companies such as Grab, Nubank and Mercado Libre.

But in the view of Omar Kanji, partner of Dragonfly Capital, there is nothing worth looking forward to in Circle's IPO application, and it is completely incomprehensible how it is priced at US$5 billion. The interest rate is severely eroded by distribution costs, the core revenue driver interest rate has peaked and started to decline, the valuation is ridiculously high, and the annual salary expenditure exceeds US$250 million. It feels more like a desperate attempt to cash out and run away before the big players enter the market.

"As Nubank, Binance and other large financial institutions begin to work with Circle, it remains unclear how the market will evaluate its distribution network and Circle's net profit margin. How the market accepts Circle depends in part on how they convey this information to investors, how they execute the story they tell the market, which stablecoin bill wins, and most importantly, how the market evolves and how stablecoins are adopted on a large scale. If USDC is dominant, then Circle can get a higher valuation multiple even if their commission rate decreases, because the market potential they can expand is huge. In any case, a few points are clear: 1) The model of sharing revenue with B2B partners will exist for a long time; 2) As the overall stablecoin market grows, the issuer's profit margin will shrink; 3) Issuers need to diversify their sources of income and not just rely on net interest margins." said Wyatt Lonergan, partner at VanEck Ventures.

In general, although the improvement of the US crypto regulatory environment and the boom in the stablecoin track have provided it with a window for listing, it is still unknown whether it can further establish competitiveness through IPO under the dual pressure of the Fed's expectation of interest rate cuts and the soaring promotion costs.