While exploring my new hometown of Boulder, Colorado this weekend it seemed like I was seeing eCigarettes everywhere. At one point a friend turned to me and asked, “Ok, how do I invest in eCigarettes?”
I personally own shares of Lorillard (NYSE: LO) for this and a few other reasons. Lorillard owns the Blu eCigarette brand, which commands the largest share of the market for eCigarettes in the US.
Whether or not you should invest in eCigarettes is a separate discussion, one that I’ll get to tomorrow. For now, let’s focus on the earlier question of how.
“How do I invest in eCigarettes?”
There are several companies in the eCigarette space though only one is a “pure play.”
The graphic below shows the 2013 market share of the major players including Blu, NJOY and Logic based on sales at convenience stores.
With the largest share of the market for eCigarettes, Blu is arguably the strongest brand in the eCigarette space. The North Carolina-based company was purchased by Lorillard in 2012 for $135 million.
The market for eCigarettes is estimated to have quadrupled from around $500 million in 2012 to around $2 billion today. So if you value Blu the same way, the company is worth $540 million today.
This is likely a conservative valuation when you consider Blu’s revenue growth, which jumped from $61 million in 2012 to $230 million in 2013.
With Lorillard’s total market capitalization of $22.1 billion, Blu only represents around 2.5% of the company. So even with strong results in its eCigarette divisions the stock will only do well if there is strength elsewhere in the company.
NJOY & Logic Technology
NJOY is regarded as the #2 eCigarette brand in the US but it is privately held. The same goes for New Jersey-based Logic Technology, the #3 brand in the US. Since we can’t invest in either of these privately held companies it’s not worth delving into them further.
I will, however, add this. A $70 million round of funding completed earlier this year valued NJOY at around $1 billion.
Vapor Corp (Nasdaq: VPCO)
Vapor Corp is another option for investors. It is the only “pure play” stock in the eCigarette industry.
The Florida-based company is different than the other publicly traded options listed here because eCigarettes make up the vast majority of its revenue stream. For large companies like Lorillard, eCigarettes are just a small piece of the overall brand portfolio.
That said, investing in Vapor Corp isn’t without its risks. Vapor Corp’s most recent earnings report was full of bad news.
Vuse is tobacco giant Reynolds American’s (NYSE: RAI) entry into the eCigarette market. Like with Altria and Lorillard, Vuse is just a very small piece of this $32.5 billion company. Though Vuse was late to enter the market, it has experienced tremendous growth.
When Altria (NYSE: MO) wanted to enter the eCigarette market it was late to the game. But just like Lorillard, it decided to acquire an already successful eCigarette company and leverage its strong distribution network to catch up.
The company bought Green Smoke for $110 earlier this year. Green Smoke makes both rechargeable and disposable eCigarettes so this is a good way for Altria to enter the market. At the time of the acquisition Green Smoke only commanded about 2.5% of the eCigarette market share.
Considering that this represents such a small percentage of the market and Altria’s distribution network is considerably strong, there is a lot of upside for Green Smoke. But at $110 million, Green Smoke is only around 0.13% of Altria.
The Bottom Line
When it comes to investing in eCigarettes it is very important for investors to know exactly what they’re buying.
Vapor Corp investors own a “pure play” eCigarette company. Investments in Altria, Reynolds American and Lorillard give investors exposure to eCigarettes but not much exposure. For the most part, you’re buying a tobacco company when you invest in any of these three “big tobacco” eCigarette plays.
The remaining top brands – NJOY and Logic – are both privately held.
“How do I invest in eCigarettes?” is the question that my friend asked me over the weekend and a question being asked by many these days. What my friend should’ve asked me, and what I’ll answer tomorrow, is “should I invest in eCigarettes?”
Disclosure: Jay Taylor personally owns shares of Lorillard.
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