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Kristal Insights5 Mins Read

Holy Smoke! The Future of Juul and the E-Cig Industry

ecig-Juul-Kristal.ai

Earlier in February of this year, Bloomberg reported that the e-cigarette maker Juul was expecting to triple its profit in 2019 – despite minor setbacks at the fag end (no pun intended) of ’18. Another number that has grown in the same time period is that of teen smokers and vapers in the United States, dramatically counteracting years of effort to curb the menace. In June, the city of San Francisco voted to ban e-cigs – legislation it had been debating for a while. Maybe, we won’t call it the ‘Fog City’ anymore, eh? 

Our student intern, Kabir Mahrotri, decided to deep dive into the Juul story and write a piece on where he thinks the electronic cigarette industry is heading. Read on!

Starting with a little history…

The modern Electronic Cigarette (or e-cigs as they are popularly known) was created in 2003 by a Chinese pharmacist after his dad died of lung cancer due to heavy smoking. But it really exploded in the U.S and U.K in 2017. It was originally created as an alternative for smokers. Vaping is considered less harmful than traditional smoking. Regular cigarettes consist of around 7,000 chemicals, many of which are toxic. Whereas e-cigarettes heat nicotine flavorings and other chemicals to create a water vapor that you inhale, which is purported to be a better alternative.

Though it sounds like a good idea, there has been a lot of controversy around e-cigs, as many teenagers around the world have started vaping, resulting in them getting addicted to nicotine. Obviously, companies that produce electronic cigarettes set age restrictions, and disclaimers on the packaging are de rigueur in most countries. However, as almost every teen out there knows – it is still very easy to get your hands on one.

Back to the present: A look at Juul’s market standing

Whether or not you buy into the ‘vaping is healthy’ adage, there is no denying that e-cigs as an investment opportunity is really attractive. While researching this trend, I have found that ‘Juul’ is one of the most popular and successful brands leading the e-cig bandwagon.

The company is worth around 38 billion dollars and was originally developed by Pax Labs. It later broke away from its parent company and spun off into its own, capturing 75% of the e-cig market in 3 years. By the end of 2019, they are expected to sell 3.4 billion dollars worth of products, almost 3 times as much as in 2018. According to Pitchbook Data, Juul is currently the second-most valuable VC-backed name in the whole of the States. Vape that, huh?

E-cigs and Juul: Kristal.AI
Juul’s growth since launch I Source: Sharepost

The list of Juul investors includes notable names like Tiger Global Management, Tao Capital, and mutual fund firm Fidelity Investments. In June of 2018, when Juul went looking for finances, the company was reportedly valued at $16 billion and ended its funding call with $1.2 in the capital. TPG Capital – one of the largest private equity investment companies in America – made headlines when it declined to invest in Juul due to ethical concerns.

Furthermore, Altria Group Inc. – an American corporation, and one of the world’s largest producers and marketers of tobacco – bought a 35% stake in Juul on December 20, 2018. Altria has dramatically underperformed the market lately due to uncertainty regarding declines in smoking rates. It’s ironic that Altria’s own e-cigarette product, Mark Ten, has been suffering in the market but the bigwigs felt they could make a big investment in Juul.

Altria now has a high debt load after the purchase, but their new investment offers a unique international growth opportunity, and their robust balance sheet is strong enough to overcome the additional debt. Altria is offering a 6.3% dividend yield, which is much higher than its 10-year average yield because of steady dividend growth along with a falling share price in recent months.

So, how cool is Juul really?

At the time of writing this, Juul has partnered with Indonesia-based PT Jagad Utama Lestari – a distributor known for selling Apple Inc. products in the country. This is Juul’s most ambitious foray in the international market and with Indonesia being a tobacco haven, this move could bring in the serious bucks for sure. According to the World Health Organization, tobacco smokers make up 35% of Indonesia’s 264 million population. Indonesia – Southeast Asia’s largest economy – also ranks second in terms of the number of cigarettes sticks sold, lagging behind only China.

It is already known the e-cig maker is also looking to expand into other Asian countries like Japan and India. However, these will be harder to penetrate due to regulatory reasons. India, for instance, is debating whether e-cigs constitute ‘drugs’ and should be banned. India currently has 45,000 vapers (according to the Indian Vaping Industry Association) and it’s leading tobacco products brand ITC is able to sell its line of electronic vaping devices in only 17 of the country’s 29 states.

And we don’t have to look at foreign shores to understand the uphill climb that Juul, and the e-cigarette industry in general, faces. San Francisco recently passed legislation (the first of its kind nonetheless), to ban the sale and distribution of e-cigarettes in order to curb its growing number of vapers – mostly teenagers. It was reported that the number of teens using vaping devices in the American city stood at 4.9 million; growing by 1.5 million in just over a year. Livermore, in California, has already followed suit with a similar law.

What all of this means for investors

As expected Juul, and other e-cig brands, are gearing up to fight the legislation. However, investing in Juul is still very risky as last year, many of their flavored products were taken off the market for being particularly popular among the young crowd. The raison d’etre for e-cigs is to help smokers and offer them a healthier alternative, which is why they are flavored. However, many now feel that the sweet flavors are the main reason more teens are being attracted to these products. Last November, Juul had to stop selling some of its best selling flavors like ‘Mango’ from its brick-and-mortar shops. The FDA also announced that it would restrict sales of flavored cartridge-based e-cigs in convenience stores and gas stations, and only allow them in licensed vape shops where it would be easier to enforce age restrictions.

This particular move did not really affect Juul’s sales by much, but it is indicative of the legal trouble Juul, and the entire industry it spearheads, could get into in the coming future – troubles that the investor community would do well to heed. Statistically speaking, the electronic cigarette industry stood at $11.5 billion in 2018 and is expected to post a CAGR of 21.6% in the next five years. But legislation, product innovation, and changing consumer preferences will play a big role in fulfilling this prediction. As I see it; in the short term, investing in companies like Juul does seem lucrative but the long-term view is intensely risky and as unpredictable as the China-America trade feud has turned out to be this volatile year.

Disclaimer

The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.

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