Vape Stocks: Massive Opportunities Come with Big Risks
October 13th, 2015
News, Top News
Vaporizing has become a popular pastime among Americans looking to consume nicotine or cannabis in a better – or at least different – way. According to Wells Fargo analysts, the number of U.S. vape shops has soared to about 8,500 and the sale of e-cigarettes and supplies climbed to about $3.5 billion, as the legalization of medical and recreational marijuana has added to the cannibalization of cigarette sales as a key market opportunity.
Investors have a number of different options when looking to capitalize on the vapor industry’s substantial growth potential, including Vapor Corp. [stockquote symbol=VPCO], Vape Holdings Inc. [stockquote symbol=VAPE], and a at least five other pure-plays dedicated to the space.
Vapor Corp. (VPCO) is the clear industry leader in terms of its 2014 revenue and its limited net loss, while Vapor Hub International Inc. (VHUB) and Vape Holdings Inc. (VAPE) have also generated more than $1 million in revenue last year.
In addition to these pure-plays, many big tobacco companies like Altria Group [stockquote symbol=MO] are also diversifying their revenue into the vaporizer industry. The largest established market leader in the space is Reynolds American [stockquote symbol=RAI], however, with its Vuse brand accounting for about 36% of all e-Cigs sold in the U.S., although these sales aren’t quite generating meaningful revenue for these companies yet.
The good news for vaporizer companies is that they may become acquisition targets for big tobacco companies looking to buy their way into the space – the key is building a large enough market share in specific areas where a deal seems necessary.
Important Risks to Remember
Vaporizer companies face a number of unique risks that investors interested in the space should carefully consider.
The FDA’s new rules regulating e-cigarettes and other vaporizer products is paramount among these concerns, since it may require federal approval for most flavored liquid nicotine juices and e-cig devices. For some smaller companies, these federal approvals could prove to be excessively costly in an environment where it’s difficult to raise funds. According to the WSJ, the approval process could cost between $2 million and $10 million.
The upshot is that larger vaporizer companies that are able to absorb the costs could benefit from limited competition in the space. In addition, the FDA announced that it would permit products that are “substantially equivalent” to vaporizers on the market before 2007, which would be subject to a retroactive premarket review. Of course, there are few products on the market today that meet the equivalency given the innovation in the space.
In addition to the FDA, there have been roughly 200 bills introduced across 40 states that address some aspect of e-cigarette and vaporizer product regulation. The overall theme of these rules are to fold the products into existing laws that apply to combustible cigarettes and other tobacco products. There is also an ongoing debate over the health of the products.
The vaporizer industry continues to experience rapid growth and investors have numerous options when looking at investing in the sector. In terms of pure-plays, many companies remain in their early stages, which could put them at risk when the FDA’s requirements hit the market. The larger players, however, could weather the storm and ultimately benefit from the increased regulations that could limit competition.
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