What's Wrong With Circle Internet Group Stock?

Circle Internet Group (NYSE: CRCL) went public earlier this year, and in the crypto world, it was one of the hottest new offerings. It soared out of the gate and for a while looked like it might be the next hot stock to own. It went public on June 5 and would finish the day at more than $83. By June 23, it would hit its 52-week high of $298.99.

But for multiple months, its shares have been in a tailspin. Since July, the stock has fallen 63%. It finished last week at a price of just over $71, down more than 76% from its high. What is wrong with the stock, and could this be an opportune time for crypto investors to buy shares of Circle Internet Group?

Image source: Getty Images.

Circle's outlook depends heavily on interest rates

Circle owns and issues one of the most popular stablecoins in circulation, USDC, which is pegged to the U.S. dollar. That makes it a potentially attractive way to invest in crypto, as opposed to investing in individual cryptocurrencies, which can be highly volatile.

But the problem is that its revenue growth hinges on two factors: the rising popularity of USDC and interest rates. Circle collects cash from people buying the stablecoin, which it then earns interest on. If interest rates are declining, that can put significant downward pressure on its revenue. However, if USDC is being more widely used, that can still offset that decline.

This year, as investors have been bracing for rate cuts, they may have been anticipating a worse outlook for Circle's revenue, thus prompting them to divest the company's stock. The good news is that USDC in circulation rose by 108% in the period ending Sept. 30. And in the period before that, its growth rate was 90%.

For now, the stablecoin seems to be doing just fine. But it's the outlook for the economy as a whole that may have investors worried about the business.

Other reasons Circle stock may be struggling

Another problem with Circle Internet Group's recent performance may simply be the sometimes fleeting popularity of crypto investments. What's hot one day may quickly fall out of favor in the weeks and months later.

Crypto investors have, after all, been seeing a lot of new ways to invest in the crypto market of late. Bullish, a cryptocurrency exchange and blockchain technology company, and Gemini Space Station have gone public since Circle Internet Group's launch, and the recent approval of multiple XRP exchange-traded funds has presented crypto investors with even more opportunities.

Plus, even with the huge decline the stock has been on, Circle still looks expensive today, trading at a forward price-to-earnings multiple, based on analyst estimates, of more than 80. That's a steep price for any type of growth stock, let alone one that generates revenue primarily from earning interest on cash -- that doesn't exactly scream growth.

Its valuation looked incredibly overpriced out of the gate, and it's still arguably too expensive today. Meanwhile, with other ways to invest in crypto, it may also not be nearly as popular as it was back in June.

Circle Internet Group stock isn't a deal, despite its reduced price

While you might be compelled to think that at a lower price, Circle Internet Group is a safer investment, I don't think that's the case at all. There's a ton of volatility and risk that comes with investing in all things crypto, even stablecoins. Even if the underlying business model may make Circle seem like a safer option to consider, it still depends heavily on the popularity of USDC.

I don't see a strong reason to invest in the company today. Although it's profitable and the business has been growing, it's not a foregone conclusion that the trend will continue for the long term and that USDC's impressive growth will be sustainable. For most investors, the safest option is to steer clear of Circle Internet Group because the stock could still go a whole lot lower.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends XRP. The Motley Fool has a disclosure policy.