After taking a long look at the
landscape of the vaporizer industry the obvious trend is two-fold
with the decline in e-cig popularity coupled with the increasing
opportunity for companies producing vaporizers and e-liquid
products gaining majority within the market. The tides have changed
in a drastic way and unfortunately it's not to the benefit of this
latest electronic cigarette M&A trend coming from Big
Tobacco.
The commotion began earlier this summer when rumors were spreading
that Lorillard (LO) maker of the blu e-cig was a possible buyout
candidate from US tobacco company, Reynold’s America (RAI).
Well, the rumors were true and in fact Reynold’s made a
$27.4Billion offer where shares of Lorillard skyrocketed.
Analysts at Wells Fargo (WFC) believe e-cigarette
sales will surpass traditional tobacco where the industry is
expected to hit $10 billion by 2017. With triple-digit growth rates
still in its future, and tobacco sales declining, it’s assumed that
the two will cross-over. Despite the previous growth of blu brand,
its market share has fallen as a result of more competition within
the space.
Both Reynolds and
Altria (MO) rolled out their own e-cig brands with
the addition of Vuse and Mark Ten, but this may not be the only
reason for the rapid decline. As noted in a more recent Wells Fargo
study, the overall appeal of e-cigarettes has diminished and
smokers are looking for an alternative product that will offer both
customizability and more choices. Analysts from Wells found that
e-cig convenience store sales declined by 5.3% in the period ending
8/30/14, “Though category $ sales remain negative, the decline
continued to moderate this period; we believe improved sequential
category results since July have been underpinned by the ongoing
national rollouts of MarkTen and Vuse…Further, we believe the sales
decline is more reflective of volume moving to vapors-tanks- mods
(VTMs) which tend to be sold in non-tracked channels (especially
vape shops) as Nielsen e-cig data is not a proxy for the vapor
category as a whole.”
Many retailers have expressed that consumers
have tried e-cigs and are either not content with the product or
simply shifted to personal vaporizer products. Convenience stores
for example, rank as one of the largest marketplaces for e-cig
sales ($530M) but vaporizers have
quickly begun taking up more shelf space and spots for point of
sale advertising. Bonnie Herzog of Wells Fargo thinks that the
first quarter of 2014 is where the industry started to really see
the vapor trend gain a foothold and drive the combustible cig and
e-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."
But here’s the thing, take a look at the vaporizer market and
you’ll quickly begin to see how fragmented it actually is.
You have independently owned single store locations and head shops
yet on the other end you have several public companies that have
started to build their brands around the new vapor trend; still
there has not been a clear market leader like there was with the
e-cigarette industry. With Big Tobacco seeming to be looking
in the wrong direction for the “alternative smoking” industry, the
top spot is up for grabs and we have been following a company that
may be quickly growing to take that spot.
In looking at the current layout
of the market today, you’ll certainly find companies out there that
boast lofty numbers and inflated marketing programs that include
heavy celebrity endorsements and over exaggerated
development. Nonetheless, when making a strong investment
decision, knowing what else is out there is paramount. For
instance, Electronic Cigarettes International (ECIG) recently
announced operating results for the second quarter and six months
ending June 30 of this year. Net sales increased to $15.4 million
for the six months ended June 30, 2014, an increase of 875% versus
prior year with nearly 2/3 of this revenue coming in during the
first quarter of 2014. The company even brought on actress and
model Mischa Barton as the ECIG’s face to its VAPESTICK® Style Icon
campaign. But despite these developments, the company
reported a net loss that was nearly 5 and a-half times larger than
its total revs. The company also trades at roughly 26 times
revenue and has a good operating margin of 53% for the 6 months
ending June 30.
Even with these results, the stock price has taken a plunge
suffering a pull-back of more than $2 since July. It’s evident that
the company will really need to ramp up its efforts during the
second half of the year to turn around its stock price. More
importantly ECIG still seems to have a heavy focus on the
electronic cigarette market and as noted by several analysts, this
will most likely face heavy consolidation as vaporizers and
e-liquids take on a larger appeal.
mCig, Inc. (MCIG) has also begun an aggressive branding strategy
but like ECIG, still continues to focus more on the e-cigarette
style products. In its most recent press the company reported
favorable progress numbers including a 1500% increase in revenues
from an abysmal $12.5k last year to a second quarter “expected”
number of $196k. Gross margin was also healthy at just over
50% which does not reflect the “recent price increase of both the
mCig® and VitaCig® which the company believes will contribute to an
increase in Gross Profit Margin in subsequent quarters.” As
has been the case with the previously mentioned company, mCig has
its “stars aligned” through a master royalty and consulting
agreement with hip-hop ‘mogul’ Rick Ross. Even though the
company has seen a dramatic pullback in price, it appears that it
is still moving forward with the planned S-1 filing for a spinoff,
IPO, and dividend of VitaCig,
Inc. So it will be interesting to see what kind of operational
strategy will take shape as far as the stance on vaporizers once
VitaCig becomes its own entity.
But once again, we are left with
the lack of a true industry leader. Both of these previously
mentioned companies who’ve employed heavy R&D plus the addition
of celebrities to support the brands have seen a dramatic drop in
stock price. Vaporin, Inc. (VAPO) is an interesting company
that has just recently performed a 1-for-50-reverse. The Company is
a distributor and marketer of vaporizers and e-liquids products.
VAPO has also just released its second quarter earnings as well as
its results for the first 6 months of 2014.
Vaporin has earned about $600,000 so far this year with a gross
profit margin of 41%. In addition, VAPO has obtained roughly
$4.3million through equity purchases, which has helped the company
increase its inventory and proceed with proper distribution to
support the sales growth, and new product development of its
vaporizer & e-liquid products. Also note that these raises were
done where the effective purchase price was at or above $5 per
share which currently would protect the market from any heavy
dilution assuming the funding parties would want to at least break
even.
Moreover, the company recently
announced that it is moving forward with its "fourth revenue
driver" through rolling up vaporizer businesses within this highly
fragmented industry. On September 3 the company announced the
closing of its acquisition of The Vape Store (www.thevapestoreonline.com), and also just signed a
lease to open a 5th vape shop in Florida. With
previously announced annualized revenue of $2.6million from the
first four stores the company acquired, this new store could bump
that number to somewhere in the ballpark of $3.25million if the new
store has the same kind of revenue performance as the other 4.
In addition to this, the post reverse price puts this stock at a
level that should attract a much more sophisticated investor
audience as compared to when it was trading at less than $0.10. In
fact the latest feature on Biz Journals . com shows that
Billionaire Dr. Phillip Frost (who made his
fortune treating diseases) is now an investor in this vaporizer and
e-liquids company. Frost owns actually 10.8 percent of Vaporin,
which operates out of the same building as his company Opko Health,
according to SEC documents filed in August.
Instead of celebrity spokes people or social media campaigning,
Vaporin is using the same strategy that blu used during its early
development 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. In addition to these
revenue channels, the company has diversified through both an
online sales approach & continuity program as well as its
nationwide convenience store roll-out. And if this wasn’t
enough, Vaporin has taken a seat in the cannabis market through a
product distribution agreement with Terra Tech Inc. (TRTC).
If you look at all of these companies including Lorillard, Altria,
Reynolds, mCig, and Electronic Cigarettes International they are
all going against what top analysts like Wells Fargo are finding,
which is to say that e-cigs are drastically declining in popularity
and are now having to even adopt more of a “low price” strategy
just to compete. The facts remain that of the entire
$2.5billion vapor market, vaporizers, tanks and mods have surpassed
the market share for E-Cigs by half a billion dollars with the
majority of sales coming from brick and mortar
retail.
To this end, Vaporin has been the
single stand-out that’s not only continuing to post quarter over
quarter revenue growth but is also working to expand with the
industry itself. This past quarter the company reported
revenues of $419k showing quarter over quarter growth of 130%. But
say the company didn’t see growth at all over the next 2 quarters
and simply maintained operations while taking in revenue from the
vape stores. Over the next four quarters that would put total
revenue run rate somewhere around the $5million (*assuming an
additional $3.25m from vape stores over the next four quarters).
ECIG currently trades at a revenue multiple of about 26x and MCIG
as of the closing of their fourth quarter ending in April is right
around 300x but say that Vaporin simply settles the next four
months out with no growth, maintains its current relationships, and
takes in revenue from the vape stores; even at a conservative 10X
multiple, not only would the market value be upwards of $50M but
with a current OS of about 3.5 million shares, the market price for
VAPO could be sitting somewhere around the $14-$18 range. For
these reasons and based on the overall amount of developments that
the company has undertaken, Vaporin, Inc. remains the stand-out for
a viable market leading company in this burgeoning vaporizer and
e-liquids market.
*Note: Additional $1.625M from quarterly revenues based on an
annualized $3.25m plus three quarters of company revs being
$419,000 and first quarter revenues of $183,000
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