As E-Cigs Begin to Take a Back Seat to Vaporizers, the Market looks for a Leader to Emerge August 25 2014
New York, NY / August 25, 2014 / If we look at this vape industry as a whole, it's just starting to gain in popularity as you'll see later in this article. Ironically, as big tobacco spends billion of dollars to gain ground in the e-cig space (most notably Reynold's America's $27.4B acquisition of Lorillard), they may actually soon find themselves behind the 8-ball when it comes to vaporizer sales. In fact as you'll read, the vaporizer & e-liquids space has quickly begun to grow, taking both market share and shelf space away from these products. In a recent review of the industry by Wells Fargo analyst Bonnie Herzog, the "Vapor Category" is starting to more meaningfully displace combustible cigarette volume. A direct result of this decline can be seen through the recent drop in sales of Blu e-cigs by more than 35%.
Christopher Growe, an analyst with Stifel Nicolaus, said the earnings decrease led him to lower his fiscal 2014 earnings forecast by 9 cents to $3.33 a share.
"We believe the blu eCigs category growth has been pressured by the proliferation of 'open-tank' vapor products…We estimate a 24% revenue decline for the year (for blu eCigs) and a $55 million operating loss for the division as the company invests heavily in the blu brand globally."
This alone shows the massive impact that the vaporizer market has had on a once dominant player who held over 40% of the e-cig market. Numerous retailers across the country have identified that many consumers have tried e-cigs and are either dissatisfied and went back to combustible cigarettes or "graduated" to personal vaporizer products. For example, convenience stores rank as one of the largest marketplaces for e-cig sales ($530M) however vaporizers are quickly taking up more "real estate" not only from the shelves but from many of the point of sale advertising spots as well. Analyst Bonnie Herzog is one who thinks that the first quarter of 2014 is where we start to really see the vapor trend take hold and drive the combustible cig decline rate at an accelerated pace.
"Bottom line, retailers are starting to either discontinue or take shelf space away from disposable e-cigs to make room for personal vaporizers given their attractive growth & margins."
In previous reports, Herzog found that e-cig sales declined 12.9% in the four weeks ended July 5 from the prior period because of lower prices and as smokers migrated to vaporizers. Herzog estimates that tanks and e-cigarettes have a combined market of about $2.5 billion with $1.4 Billion attributed to e-cig sales and $1.1 Billion to Vaporizers; she believes that tanks will overtake the latter in the next decade.
Retailers, Ms. Herzog said, are even starting to discontinue or take shelf space away from e-cigs to make room for tanks, "given their attractive growth and margins." In fact, one of the most prominent retailers of these products, convenience stores, have also realized slower growth rates in both e-cig sales as well as traditional cigarette products.
Even though vapor tanks are thought of by consumers as being hunkier than the standard e-cig, they do allow smokers and would-be quitters to customize nicotine levels, as well as to puff thousands of flavors. A cult-like following is likely to grow as "vaping" becomes more fashionable and more stores carry the battery-powered metal tubes in a wide range of colors. As a result e-cigarette sales are slimmer this year, prompting manufacturers to invest in the next generation of inhalant products.
As this new market begins to emerge, we start to dive deeper from an investment view not only to find who a potential market leader may be but to also find those undervalued "diamonds" so to speak that truly show potential for grabbing the most market share early on. In this report, we looked at 3 companies all of which have just submitted recent SEC filings and who boast that they have unique or breakthrough products. The first company we looked at was Vape Holdings (VAPE), which focuses on designing, marketing, and distributing various vaporization products. The company offers medical and food grade ceramic products primarily under its “HIVE Ceramics” brand throughout North America, Europe and South America. In the company’s most recent filing, VAPE shows to have posted “record” quarterly revenues of $361,781, bringing its 9-month number to a total of $392,540.
"We are extremely pleased with the Q3 2014 financial results that represent our first big push to market since our products began shipping full scale in mid-May," stated Vape CEO and Chairman Kyle Tracey.
At $2.30 (as of Friday’s close), this is the highest-priced vaporizer company in our report. VAPE trades at roughly 51x revenues with the current market cap of $19.8M and despite its record numbers, was only able to generate a gross margin of a mere 6.8%. As far as a value play here, we think that Q3 will be a very important time for Vape Holdings to show its true potential not only because it has just begun shipping products full scale but the company has also recently launched an e-commerce site as well.
mCig, Inc. (MCIG) was the second company we are profiling in this market update. This company focuses on two trends currently gaining obvious attention: (1) The decriminalization and legalization of marijuana for medicinal or recreational purposes; (2) The adoption of electronic vaporizing cigarettes. The company manufactures and retails the mCig and owns Vapolution, Inc., which manufactures and retails home-use vaporizers such as the Vapolution 2.0. Through its wholly-owned subsidiary, VitaCig, Inc. the company manufactures and retails the VitaCig, a $5 nicotine-free eCig that delivers a water-vapor mixed with vitamins and natural flavors.
This was a bit different in that the company’s actual filing shows 640% jump in annual revenues from $50,000 in 2013 to $370,077 however if you read through the company’s annual report, it will show the mCig generated company-wide revs of %543,000 but management notes the figure includes revenues from Vapolution, Inc., which means it does not comply with US GAAP figures that were actually reported in the 10-K. Despite this piece of information, mCig has shown more favorable results from operations in that its gross margin was roughly 57% based on the reported $370k figure. With a market cap of nearly $111M, MCIG is trading nearly 300 times revenues at its current share price of $0.41 and it should also be noted that the stock has just recently begun to rebound following last Monday’s sell-off. The company boasts strong favor from its celebrity spokespeople including Bam Margera and Rick Ross who actively support the mCig and VitaCig brands. We feel that the results from this next quarter should decide the fate of MCIG based on its recent successes from Vapolution and the adoption of its notable celebrity-driven marketing strategy.
Finally, we took a closer look at Vaporin, Inc. (VAPO) and based on the results of this study, feel that this company could be the most undervalued and highest performing one out of the three. Instead of celebrity spokespeople or social media campaigning, Vaporin is using the same strategy that Blu used early in its development for e-cigs not only to gain an early market share in the vape space but also to establish itself as a potential leader in the vaporizer & e-liquids industry. The company has also diversified through both an online sales approach & continuity program in addition to its nationwide convenience store roll-out. Additionally, Vaporin has dove into the cannabis market through a product distribution agreement with Terra Tech Inc. (TRTC).
For the 6-months ended June 30 Vaporin shows a total of $602,163 in revenues (the highs of the 3) and a gross margin of 41% coming in only second to mCig.
"I am proud of what we have been able to accomplish thus far in 2014. Based on the compounded growth that we have experienced over these last 6 months, we are confident in our ability to continue this trajectory throughout the remainder of this year. We are also looking at opportunities for product line expansions and the addition of celebrity spokespeople for the next phase of company growth and ongoing campaign to build brand awareness," stated Scott Frohman, CEO of Vaporin in a recent shareholder update.
In keeping all things the same, if Vaporin were to be trading at 50x or even 299x revenues similar to Vape Holdings or mCig, one would think that this could be the highest-priced stock amongst the group but at $0.07, this company not only has posted higher revenue numbers to this point but it is also only trading at roughly 20x earnings making this possibly the most undervalued stock in the bunch. A similar valuation even if it were like Vape Holdings, would show the per-share price at around $0.18 and in a similar case as mCig, the pps would be around $1.07 with the current outstanding share count remaining the same for both cases.
Much to its credit, Vaporin has been working a gorilla marketing angle and even as other companies like Vape and mCig are seeing more growth, this next quarter should be the true tale of the tape as to which one of these companies will emerge as a market leader thus giving investors an opportunity to find value in an industry that’s already be slated for increased growth over the next several years. At this point, the vapor revolution is ripe for investment a right play with a company showing the biggest potential could pay off in the long run. Looking at it from this angle, early investors in Lorillard previous to its purchase of blu saw great returns and increased value as blu became a leader in the space. Now that vaporizers have taken center stage, this next wave of investment could offer more, especially because the companies within the space trade at a far lower share price compared to where Lorillard was when it brought on Blu.
The final decision is up to the investor and of course when looking in the small-cap space; volatility and price risk must be taken into consideration. Always consult a professional when deciding to make any investment. The above report is simply based on overall opinion and should not be taken as investment advice.