Morgan Stanley: Circle’s USDC growth slows as distribution costs weigh on longer-term earnings outlook

Why did the third-quarter forecast rise while the longer-term outlook weakened?

Morgan Stanley raised its forecast for Circle’s 2026 third-quarter GAAP diluted earnings per share from $0.40 to $0.56, primarily because the mark-to-market result on digital asset holdings shifted from an expected loss of about $86 million to a gain of about $5 million, offsetting the effect of a lower circulation forecast.
But the bank cut its earnings per share forecasts for 2027 and 2028 from $1.69 and $1.85 to $1.49 and $1.71, respectively, mainly because of lower expected USDC circulation growth and higher distribution costs.
Morgan Stanley maintained its Underweight rating and cut its price target from $37 to $34; the valuation remains based on 20 times forecast 2028 earnings per share.

The bank expects USDC circulation of $73.3 billion at the end of the third quarter of 2026, unchanged from the prior quarter, and $76.3 billion at the end of 2026, up 1.3% year over year. Its growth forecasts for 2027 and 2028 were cut to 15.7% and 13.6%, respectively, from 19.7% and 16.4%; they are also below management’s assumed multi-year compound annual growth rate of about 40%.
Circle’s business remains highly dependent on USDC balances and reserve yields. Morgan Stanley believes increased stablecoin use could also take the form of faster turnover of existing balances, rather than a corresponding expansion in circulation; the company has yet to explain how it will turn higher turnover into revenue.
Higher yield assumptions provide some cushion: the bank raised its annualized yield forecasts for 2027 and 2028 to 4.46% and 4.50%, leaving its reserve income forecasts for the two years roughly unchanged and down only about 1%, respectively.

Circle recognizes reserve income on a gross basis, while payments to partners are recorded as distribution costs. Higher revenue sharing therefore mainly reduces income after distribution costs and its margin, rather than directly reducing reported revenue.
Morgan Stanley’s base case assumes that after approximately $5 billion of Hyperliquid’s USDC moves to the Coinbase platform, Coinbase receives 100% of the reserve income on that balance, up from 37.5%; Coinbase then passes 90% of its share to Hyperliquid.
After accounting for existing partnership costs, the bank expects this arrangement to increase distribution costs by about $80 million in each of 2027 and 2028, reduce earnings per share by $0.21 in each year, and lower the margin on income after distribution costs to 40.5% and 39.0%, respectively.

Morgan Stanley included $180 million of recognized Arc token revenue in its third-quarter other revenue forecast and expects a further $62 million to be recognized in the first quarter of 2027.
But Arc’s early active account count and transaction volume have both declined recently. The bank believes investors are unlikely to assign a valuation to this revenue before network activity improves significantly; it wants to see sustained circulation growth, the ability to retain reserve income and more recurring transaction revenue before becoming more optimistic about Circle.