Circle Stock Downgrade: Why Morgan Stanley Sees $38

Circle Internet Group (CRCL) slid roughly 5-7% on Monday, Aug 3, trading down toward the $59-62 range, after Morgan Stanley cut its price target by 64% and downgraded the stock to Underweight with a new $38 target. That's one of the most aggressive analyst calls on the stock this year, and it lands two days before Circle reports Q2 earnings on Wednesday, Aug 5. The stock is now roughly two-thirds below its 52-week high of $189.92, extending a downtrend that has held below its longer-term moving average for weeks.

The size of the cut is the tell. Analysts trim targets 10-15% when a quarter merely disappoints. A 64% cut means Morgan Stanley isn't nitpicking one number — it rebuilt its entire multi-year model of how Circle makes money and concluded the machine is smaller than the market has been pricing.

Circle earns money almost entirely one way: it holds the dollars backing USDC in interest-bearing reserves — Treasury bills, repo, cash — and keeps the yield. That reserve income is roughly 94% of Circle's revenue, with barely a second business line to fall back on. Morgan Stanley's thesis is that this single engine is being squeezed from three directions at once.

First, USDC's circulating supply has stopped growing. It peaked near $80 billion in March and has since drifted down to roughly $72-76 billion. In Q1 alone, about $72 billion was redeemed against $73 billion minted — barely net growth, a stall that used to be the entire bull case for the stock.

Second, the yield Circle earns on what remains is compressing on its own, independent of supply: Circle's reported reserve yield fell from about 3.81% to 3.50% quarter-over-quarter in Q1. Third, Circle is sharing more of that shrinking yield with USDC holders and distribution partners just to stay competitive, cutting its own take further still.

Stack those three together — a smaller reserve pool, lower yield on it, and a smaller share of what's left — and Morgan Stanley's model cuts USDC-related revenue assumptions by roughly 33% for 2027 and 44% for 2028. That's what pushes projected GAAP earnings per share up to 20% below where the rest of Wall Street currently sits, and that gap, not Monday's headline number, is the actual basis for $38.

This is the question Wednesday has to answer, and it cuts both ways. The bear case is straightforward: tokenized money-market funds and other yield-bearing dollar products are pulling capital away from non-yield-bearing USDC, and that looks like a structural shift in how institutions want to hold digital dollars — not a one-quarter blip. If redemptions keep running close to new issuance, USDC's supply, and Circle's revenue base with it, simply stops compounding.

The counter-argument is that Circle isn't only a reserve-yield business anymore. Morgan Stanley's own note flags Circle's "agentic payments" push — AI agents and automated systems settling transactions in USDC — as a genuinely new use case, currently running around $41,900 in daily volume. That's a rounding error today next to a $72 billion reserve book, but it's the kind of number a payments-infrastructure bull points to as early evidence of a second revenue leg forming, even if it can't yet offset what reserve income is losing.

Neither side has decisive proof yet. That's exactly why Wednesday matters: it's the first quarter where Circle has to show actual USDC circulation and actual reserve yield, not analyst estimates of them.

Morgan Stanley isn't the only voice here. The same morning it cut Circle to $38, TD Cowen initiated coverage at Buy with an $82 target — more than double. TD Cowen's case leans on payments-infrastructure optionality, treating stablecoin rails as a platform play, rather than modeling Circle as a pure reserve-spread business. That leaves Wall Street split across an unusually wide $38-to-$82 range on the same stock, which is itself a signal: analysts don't just disagree on the multiple, they disagree on what kind of company Circle is.

Wednesday's print is the tie-breaker. Consensus expects EPS of roughly $0.17-0.19 on revenue near $720 million. A miss, or guidance that flags continued USDC redemption pressure and further reserve-yield compression, hands the argument to Morgan Stanley. Numbers showing circulation stabilizing and yield holding up better than modeled would give TD Cowen's thesis real ammunition, and would make Monday's sell-off look overdone in hindsight.

Worth noting: CRCL sold off on Monday while other crypto-adjacent stocks were roughly flat to higher the same day, which suggests the market is treating this as a Circle-specific problem, not a sector-wide one. Whether that isolation holds up is itself part of what Wednesday's report will test.

The realistic base case is that CRCL stays volatile and range-bound through and just past Wednesday's report, and that the Q2 print alone probably won't fully close the $38-versus-$82 gap unless USDC circulation and reserve-yield numbers break clearly one way. Because Morgan Stanley's argument is structural — years of modeled compression, not one bad quarter — a continuation of the current downtrend looks more likely than a snap-back rally, absent a surprise in the numbers.

What would break that: USDC circulation turning higher again, reserve yield holding closer to 3.8% than 3.5%, or management guidance that treats tokenized-MMF competition as containable rather than open-ended. Any of those would strengthen TD Cowen's case. The opposite — continued redemptions, further yield compression, cautious guidance — pushes the stock toward fresh 52-week lows and validates the call that triggered this week's slide. Either way, the next Fed rate decision adds a second, independent squeeze on reserve yield regardless of what Circle reports Wednesday, so even a clean quarter doesn't remove the pressure Morgan Stanley is underwriting against.