Earlier today I introduced the topic of investing in eCigarettes. The eCigarette industry is experiencing tremendous growth, quadrupling between 2012 and today. So it should come as no surprise that the space is generating considerable interest from investors.
Still, there are serious risks to investing in eCigarettes.
For starters, there is really only one “pure play” eCigarette investment. The other ways to invest in eCigarettes involve buying shares of one of the big three tobacco companies. Since each of these companies owns an eCigarette brand that is just a small percentage of the larger company, such an investment only gives you a small amount of exposure to the eCigarette industry.
Hence the interest in Vapor Corp (Nasdaq: VPCO).
Vapor Corp is essentially the only publicly traded company that is a “pure play” investment in eCigarettes and related supplies. As such, it gets a lot of interest from people who want to invest in the quickly growing industry.
3 Reasons to Avoid Vapor Corp Stock
1. Market Capitalization
With a market capitalization just under $85 million, Vapor Corp isn’t quite small enough to be considered a “nano cap” stock, but is on the smaller side of the “micro cap” designation. As such, the stock is extremely volatile.
Think of it like a penny stock. Is there tremendous opportunity? Possibly. Is there tremendous risk? Definitely.
With a 52-week low of $3.52 and a 52-week high of $10, the stock trades with a considerable amount of volatility. Today it trades right around the $5 mark.
With an average of only 106,000 shares traded daily, Vapor Corp shares trade on very thin volume. By contrast, 1.93 million shares of Google (Nasdaq: GOOGL) change hands on the average day. That makes it prone to huge price swings.
In a nutshell, this is a very risky stock. It should not be owned by the risk-averse. But that alone isn’t why you should avoid Vapor Corp stock.
2. Inventory and Production
Vapor Corp’s most recently reported financial results were dismal.
The company reported $4.8 million in revenue for the first quarter compared to $6.4 million in the same quarter last year. That means that sales actually decreased while the rest of the industry was growing.
Vapor Corp cites inventory issues related to its suppliers in China and notes that $1.25 million in revenue was shifted to the second quarter.
But even if Vapor Corp had earned that $1.25 million of revenue in the first quarter the company would’ve only brought in $6.05 million, still a decrease from the year before.
That is not good for a company in an industry that is rapidly growing around it.
With decreasing margins and higher marketing expenses for less revenue, the story only gets worse as you dig deeper.
A product is only as good as its distribution.
In the case of tobacco companies, distribution is the name of the game. Each of the big three tobacco companies – Altria (NYSE: MO), Reynolds American (NYSE: RAI) and Lorillard (NYSE: LO) – has at least one eCigarette brand.
These are companies that have been in the business of making and distributing cigarettes for decades.
Aside from somewhat obscure online distribution, the traditional tobacco distribution networks are the same distribution networks that will dominate eCigarette sales.
These are the distribution networks that Altria, Reynolds American and Lorillard dominate. And I do not expect them to make it easy for Vapor Corp and similar companies to penetrate their distribution networks.
The Bottom Line
Resist the urge to buy Vapor Corp. Just because it is one of the only ways to get direct exposure to eCigarettes doesn’t mean it is a good investment.
The company appears to be in bad shape. It is David against a Goliath system of tobacco distribution. Plus the stock is simply too volatile for serious investment. I suggest you avoid Vapor Corp stock.
Disclosure: Jay Taylor personally owns shares of Lorillard.
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