JP Morgan analysts initiated coverage of Circle with an “Underweight” rating on Monday, questioning the fair value of the stablecoin issuer’s stock since its highly anticipated IPO reignited interest in the stablecoin sector.

“We think highly of the Circle management team and are confident in the outlook for outsized stablecoin and USDC growth,” the analysts stated. “However, we see Circle’s current market capitalization elevated.”

JP Morgan pencil-predicted a $80 per share price target by year-end 2026, valuing the company on a price-to-earnings ratio of 45x, comparable to peers like Robinhood. This target implies a $10 premium, reflecting analysts’ belief that current investor enthusiasm for the stablecoin landscape justifies a particular valuation, albeit one they argue is ultimately excessive.

While Circle’s USDC does not offer a yield like tokenized money-market funds (tMMFs), the passage of stablecoin legislation could help USDC capture market share from Tether’s USDT, according to the analysts, giving the “compliant and trusted brand” an edge. However, lawmakers imposing stricter regulations could increase capital requirements for Circle, potentially hindering USDC growth.

Interoperability is a potential strength for Circle’s USDC ecosystem. Meanwhile, Circle’s dominance in dollar-pegged tokens relies on holding substantial reserves of cash and U.S. Treasuries, making its “business model highly sensitive to interest rates.”

JP Morgan analysts expect Circle’s stock to face pressure over the near term due to the aforementioned factors, with the stock experiencing recent volatility (fell 25% last week). Circle shares, on the other hand, had reached an historical peak above $299 since going public.

In conclusion, while JP Morgan highlights the strong prospects of the stablecoin industry and Circle’s USDC within it, the analysts believe these factors alone cannot sufficiently offset the overvaluation concerns at current market levels. A significant catalyst could be the stablecoin legislation expected to pass, which they expect to ultimately favor USDC but pose regulatory challenges in the immediate term.