Circle stock price surges 87% in a month! How the US-Iran war and trader position adjustments are driving the rally?

The rise in oil prices and inflation expectations driven by US-Iran conflicts, along with heavy short covering by traders, caused Circle’s stock price to surge 87% in one month. However, analysts warn that its current valuation is severely overestimated based on valuation models and price-to-sales ratios.

Circle’s stock price soared 87% in one month—did the US-Iran conflict help?

Stablecoin USDC issuer Circle (stock ticker: CRCL) saw its share price rise about 10% last night (3/9), with a cumulative increase of 87.18% over the past month. Although still below the peak during last year’s IPO, the remarkable rally has attracted market attention.

Mizuho Bank pointed out that the rebound in Circle’s stock price reflects the spike in oil prices caused by escalating tensions in the Middle East.

Since the outbreak of conflict in the Persian Gulf on February 28, West Texas Intermediate crude oil prices have surged about 35%. Mizuho Bank’s analysis suggests that high oil prices could reignite inflationary pressures, reducing market expectations for the Federal Reserve to cut interest rates, thereby limiting the central bank’s ability to lower rates.

All else being equal, stablecoin issuers benefit from higher interest rate environments, as their USD reserves can earn higher yields.

Image source: Google

Are trader position adjustments the key?

Trader position adjustments also played a crucial role in the stock price surge. Although Circle’s Q4 financial report showed steady growth in USDC supply, analysts believe that the significant price volatility mainly reflected short covering driven by crowded short positions before the earnings release.

Markus Thielen, founder of 10x Research, told CoinDesk that trader position adjustments are the real catalyst behind this rally, with headline data having a relatively limited impact.

His data shows that hedge funds had accumulated large short positions before the earnings report, creating a high-probability short squeeze scenario without a fundamental reevaluation. FactSet data indicates that currently, short interest accounts for about 13% of circulating shares, which could be covered in about two days.

Further reading:
Hana Bank partners with Circle and exchanges! Testing USDC payments in South Korea, offering 5% cashback to consumers

Is Circle’s stock overvalued or undervalued?

Regarding whether Circle’s current stock price is overvalued, analyst Bailey Pemberton analyzed using two methods:

Discounted Cash Flow Model

Pemberton used a discounted cash flow (DCF) model, projecting future free cash flows and discounting them back to present value to estimate the company’s current worth.

For Circle, the model employs a two-stage free cash flow to equity approach. The past 12 months’ free cash flow was approximately $336 million, with projections reaching $628.9 million by 2030.

Adding these discounted forecasts and terminal value, the estimated intrinsic value per share is $42.25. Compared to the current price of $111.84, the stock is overvalued by 164.7%, indicating a significant overestimation.

Image source: Bailey Pemberton

Discounted Cash Flow Model valuation, projecting future cash flows and discounting back to present value to estimate current enterprise value.

Price-to-Sales Ratio

Pemberton then examined the price-to-sales (P/S) ratio, which measures how much investors are willing to pay per dollar of sales.

Circle’s current P/S ratio is 9.67, while the average for the software industry is 3.56, and its peers average around 9.00, indicating overpricing.

Considering Circle’s profit growth, profit margins, and risk profile, analysts estimate a fair P/S ratio of 3.97. Comparing this to the actual 9.67, the metric also suggests the stock is expensive and carries high overvaluation risk.

Image source: Bailey Pemberton

P/S ratio indicator measures how much investors pay per dollar of sales

This content is summarized and edited by Crypto Agent from various sources, reviewed by “Crypto City.” It is still in training, and may contain logical biases or inaccuracies. The content is for informational purposes only and should not be considered investment advice.