Summary Circle Internet Group remains a long-term growth story, but shares are still expensive despite a recent 60% pullback. Selling put options on CRCL, specifically the February $65 strike, offers a 22%+ annualized yield and a lower entry point if assigned. CRCL's revenue growth is driven by stablecoin adoption, but falling rates and rising costs present near-term headwinds and risks. We maintain a Hold rating on CRCL, and we favor selling puts over buying shares outright for yield-oriented investors seeking lower-risk exposure. A few months ago, we wrote an article titled " How We're Earning A 14%+ Yield Selling Puts On Circle Internet Group. " In it, we laid out a strategy for earning a significant yield from Circle Internet Group's ( CRCL ) recent IPO, by selling far out of the money put options that promised to pay out a 14% annualized cash yield. While we thought - and still think - that CRCL will perform well over the long term as a company, at the time, the stock was trading around $240 per share, which, in our eyes, was an extremely premium valuation. In recent months, shares are down roughly 60% from highs, as market hype around stablecoins has dissipated and the company’s first earnings report showed rapidly deteriorating gross margins. This has been a disaster for those who purchased shares during the post-IPO rally. However, the conservative trade idea that we recommended produced exactly the returns we thought it would, as Circle's stock held up above $80 per share through mid-October: TradingView Seeking Alpha Investors who took this trade pocketed $380 per contract - or a 4.5% return - in just 117 days, and didn't have to take assignment of the stock. At present, Circle is in a slightly different position. Shares are much cheaper, volatility has fallen, and the company has announced a number of new initiatives that we expect will grow future revenues meaningfully. That said, shares are still expensive, and the ongoing rate cut cycle we're seeing will likely present a significant revenue headwind in the short and medium term. Thus, we’re still not quite willing to pay up for Circle's shares. Instead, we're recommending a similar trade to the one we highlighted in June - that selling put options on CRCL will likely generate substantial yield with relatively minimal risk, especially versus holding the stock outright. Today, we'll cover recent updates with CRCL, give our perspective on the upcoming earnings report, and highlight a 'short put' trading opportunity we think looks attractive. Sound good? Let’s dive in. The Thesis To start, let’s cover our general thesis behind Circle, and why we think the company is poised to grow considerably over the next 5 to 10 years. In short, we, broadly, believe that an increasing share of transactions will move towards crypto markets over time. This is due to the fact that crypto markets provide near instant settlement, 24 hours a day, 365 days a year. Not only that, but transaction fees are typically very low in Crypto, allowing for a near-frictionless exchange of value. As decentralized payment networks propagate, we expect a larger share of payment volume, commercial volume, and even more complex financial transactions like trading and lending, to take place on public and corporate blockchains. As use of these new money networks becomes more widespread, demand for stable value exchange will also grow. This is where stablecoins fit into the current crypto ecosystem. Sure, bitcoin is the 'gold standard', and is often thought of as digital gold, but the asset has too much volatility on a day-to-day basis to be used for transactions, treasury management, payment accounts, etc. Stablecoins bridge the gap between Fiat currencies - which is what we’ve used in the past - to digital currencies, which is where we see the future of money heading. Circle is the largest public issuer of stablecoins, which it primarily does through its USDC product, which has almost 30% global market share. The business is simple: as customers mint and use USDC, they leave their Fiat currency deposited with CRCL, who, in turn, invests into treasuries that produce significant reserve income. This is CRCL's primary revenue source, and on a digital currency stock of tens of billions of dollars, CRCL produced over $2.1 billion in revenue over the last 12 months, almost all of which came from US treasuries. Circle has three main levers that it uses to produce revenue. First off, rates are key. If rates go down, then the return that Circle earns on its reserve holdings also decreases. Right now, this is a negative, but it also positions CRCL as a huge beneficiary in a rising rate environment. Secondly, another one of CRCL's levers is the market cap of its overall outstanding stablecoins. This is an input that the company has much more control over, and thus, CRCL is invested in aggressively distributing and driving network effects for its three core financial products, USDC, EURC, and UYSC. CRCL expects a ~40% compounded annual growth rate for the overall stablecoin market, so if USDC can retain or grow market share, then there’s a significant growth opportunity here. Finally, CRCL offers value-add services on top of its digital money ecosystem. Many of the firm's recent innovations, like the Circle Payment Network and Circle Gateway, are primarily designed to boost adoption of USDC, but we expect that as the product ecosystem matures, CRCL will have significant leverage to charge additional fees for value add services, similar to what Visa ( V ) and MasterCard ( MA ) do right now. Earnings While we’re bullish on the company, CRCL's Q2 earnings numbers were a mixed bag. From an operational standpoint, the company announced its new public blockchain , Arc , and announced developments with the Circle Payment Network, Circle Gateway, Circle CCTP, and more. We expect these investments will pay off handsomely as the overall market share of stablecoins grows: IR On the flip side, the company’s actual earnings came in much weaker than expected. The company reported $658 million in revenue - an all-time quarterly high (at least for the public numbers we have available) - but massive increases in the cost of revenues drove gross profit margins negative to the tune of $252 million in the Q2 alone. Stacked on top of the operating expenses of around $73 million for the quarter, CRCL produced negative operating income of $325 million. This massive increase in the cost of revenue represents continued investment in the distribution of CRCL's stablecoin network, including rewards paid out to deposit holders on platforms like Coinbase ( COIN ). At the same time, the company has traditionally kept gross profit positive, at least for the four quarters preceding Q2. It’s clear that CRCL is allocating IPO proceeds towards growth, as opposed to improving profitability. Broadly, this makes sense to us, but for investors looking at headline numbers, it obscures the story considerably. Rates have also gone down over the last year, and so the linear increase we'd expect to see in CRCL's revenues, as a result of the increased Stablecoin market cap, has not been fully reflected. This is the interest rate headwind we mentioned earlier. Thankfully, Q3, which was just announced, showed a number of improvements. Analysts were estimating revenue of $700 million, with an EPS estimate of around $0.18, and CRCL managed to produce revenue of roughly $740 million and EPS of $0.82, which were both positive surprises. Gross margins went up, which was a bit of a relief, but more broadly, we remain interested in the underlying 'operating' metrics like Meaningful Wallets, overall distribution, and market share. In our view, if the 'inputs' to the economic machine are positive, then sooner or later, the financial results will take care of themselves. Meaningful Wallets grew up to 6.3 million, and we'd like to see this metric grow even more quickly in the future as network effects propagate. Similarly, we're happy with USDC's market share of roughly 30%, but this number will need to move north for CRCL to gain truly impressive economics: IR At present, shares are trading at a P/S ratio of roughly 7.3x, but analysts expect revenues to grow to $6.2 billion by 2028, which should shrink this ratio considerably, to below 4x. All told, we'd prefer to get shares a little bit lower than they’re currently trading, but we’re much happier with the value proposition in shares than we were six months ago, especially following the recent selloff. The Trade Our favorite way to play the stock is still by selling put options on shares. Particularly, we like the idea of selling the February 19th, $65 strike put options: sofi.com Contracts are currently trading between $3.55 and $4.45 per contract, and we expect that you could get a contract filled at around $3.80, implying a $380 profit per contract if shares of CRCL stay above $65 over the next 99 days. At this price, investors stand to make 6.2% - or a little bit more than ~23% annualized - on their money, assuming CRCL options to stay above the $65 strike price. In the event that shares trade below $65, option sellers still get the aforementioned yield, but they may also be assigned shares of Circle. In that event, then investors can get shares of CRCL with a cost basis in the low 60s, which, we think, is a significant long-term value. As a result, selling options on CRCL looks like a win-win trade - either you get a robust cash-on-cash return over the next few months, or you get a solid 'buy-the-dip' entry point into CRCL's long-term story. Risks Of course, there are risks associated with this trade, and we'll point out three of those now. First off, CRCL has a number of revenue levers that we talked about earlier. Rates are a key risk for CRCL's long-term health, and if rates stay lower for longer, than it will have a serious impact on the company's overall profitability. That would make shares considerably more expensive than they currently look, making an entry point at around $70 per share potentially less attractive. Secondly, over the course of this option trade, we’re expecting an earnings report. Everyone knows that earnings are typically a volatile time for investors - so these events could send the stock materially lower. This has implications for short-term profitability for option sellers. The IPO lock-up also expires this week, which is a consideration. Finally, if you sell options in CRCL, then even if the stock's price goes to zero overnight, you’ll still be forced to purchase shares at $65 per share, representing a material capital impairment. This profile is no different than holding shares outright, but it’s worth mentioning for those who haven’t traded options before. Summary Overall, we think selling put options on CRCL (again) is a great use of capital in today’s market. The 22%+ annualized yield represents a significant income to yield oriented investors, and a cheaper entry price point into CRCL's long-term story, in the event of assignment - looks like a strong value proposition. As a result, we still rate shares a 'Hold', but we think selling $65 strike options could be a great use of your time and money. Cheers~
