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Juul's International Ambitions May Be the Real Value for Altria

For all the controversy surrounding electronic cigarettes and vaping, it's still a major growth industry, and Juul Labs continues to lead the way.

Tobacco giant Altria (NYSE: MO), which took a 35% stake in Juul with a $12.8 billion investment last year, says the e-vapor category grew 40% over the first six months of 2019, and Juul was responsible for virtually all of it.

A Juul electronic cigarette and its pods. Image source: Juul Labs.

Yet regulatory hurdles could severely diminish its potential in the U.S., perhaps even leading to its eventual removal from the market. Former Food and Drug Administration commissioner Scott Gottlieb says he doesn't see how Juul gets past the FDA because of the device's popularity among teenagers.

While that would greatly devalue Altria's investment in the e-cig leader, it just might be outside of the U.S. where the true potential of Juul Labs lies.

The world awaits

The U.S. is the world's largest e-cig market, but that could be because it was established here earlier, allowing smokers who wanted to quit cigarettes to latch onto the devices for help. And now as they are introduced into more countries, we may see those markets surpass the U.S.

Data from Euromonitor International indicates the Asia-Pacific region is by far the biggest tobacco market in the world with a 66% share, followed distantly by Western and Eastern Europe and the Middle East and Africa with 9% shares. North America comes in fifth with a 5% share, showing there is much more growth potential for electronic cigarettes elsewhere around the world.

That is borne out by the experience of Philip Morris International (NYSE: PM) after introducing its heat-not-burn IQOS device in Japan. It soared in popularity by convincing early adopters to try the product. While sales slowed when it had to convince older, more traditional Japanese to make the switch, Philip Morris now ships more heated-tobacco units to the country than it does actual cigarettes.

Japan's regulatory landscape is an anomaly since it regulates the kind of e-liquids that other devices use as prescription medicine, so it effectively bans the IQOS' competition from the market.

But even in other countries where the uptake may not be as swift as it was in Japan, Philip Morris is seeing sales growth and market share gains, even though the IQOS has not been fully introduced.

The global tobacco giant says its share of the reduced-risk product market increased to 2.4% in the European Union, with strong growth in Italy, Poland, and Germany, and even stronger gains in the Czech Republic, Greece, Latvia, and other Eastern European countries.

Only just getting started

Juul's outsized popularity in the U.S. could very well translate into similar demand elsewhere, as its design is sleek, compact, and unobtrusive. It is only just getting started in international markets, and is currently sold in Canada, the U.K., France, Spain, Ireland, Germany, Italy, Austria, and Russia, but not in every region of each country. It also has big plans to expand into the Asia-Pacific region.

Leading vape shop supplier Greenlane (NASDAQ: GNLN) recently said that while demand for Juul products remained robust in the U.S., with gains of 48% in the second quarter, it was "incredibly robust" in Canada in the first quarter, leading to a 70% spike in Juul total net sales for the period. (There were no corresponding sales in Canada a year ago to get a year-over-year comparison.)

Altria expects it will be another year before Juul Labs really begins to gain traction overseas. As it increases its footprint, and with the market opportunity presented by foreign markets, Juul could begin to upset the balance of power and even threaten Philip Morris in the countries where it is already making headway.

Each country, though, has its own unique set of regulations for electronic cigarettes. And because the tobacco industry holds significant political sway in some countries, such as Indonesia, it may not always easily translate in big sales.

Still, as Juul Labs sets its sights on foreign expansion, the leading electronic cigarette could really come into its own and dramatically increase the value of Altria's investment, even if it ends up being shut out of its home market. And if U.S. regulations aren't nearly as draconian as expected, this could become a monster hit for Altria.

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