Mizuho Downgrades Circle, Cites Open USD Threat

Mizuho Securities downgraded Circle Internet Financial to an "underperform" rating on May 22, 2024, and reduced its price target for the company's stock to $50. The downgrade was primarily driven by concerns over the potential impact of Open USD, a new stablecoin offering, on Circle's profit margins. Mizuho analysts believe Open USD's yield pass-through model could pressure Circle's existing business by incentivizing distributors to shift reserve income away from Circle.

Specifically, the report from Mizuho suggests that Open USD's approach of passing on yield directly to users or distributors could erode the revenue streams that Circle currently benefits from its management of stablecoin reserves. This competitive pressure could lead to a reduction in the net interest income Circle earns, thereby impacting its overall profitability. The $50 price target reflects this anticipated margin compression and increased competitive risk.

Circle, known for its USD Coin (USDC) stablecoin, has historically relied on the income generated from the U.S. Treasury securities and other high-quality liquid assets held in reserve to back its stablecoins. This reserve income has been a significant contributor to its financial performance. The introduction of a competitor with a different yield distribution strategy poses a direct challenge to this established model. The analysis from Mizuho indicates a potential shift in market dynamics where stablecoin issuers may need to rethink their reserve management and yield-sharing strategies to remain competitive.