The Deadly Origins of the Next Disruptive Technology

The Ford Model T. The personal computer. Email.

What do all these innovations have in common? They were highly disruptive. They created new industries and new markets. They rendered others obsolete and outdated. They provided consumers with something they did not know they wanted.

Famed economist Joseph Schumpeter referred to this process as “creative destruction.”

Early investors in these companies certainly took on a lot of risk. There was no way to know whether or not an idea would be profitable. After all, these ideas had no track record. They were completely new.

As with all investing, higher risk leads to higher reward. And these early investors were handsomely rewarded for taking on this high level of risk.

The industry I am going to tell you about has some of these types of companies in it. While we aren’t at the very beginning, we are still early enough to see significant upside.

What is this industry I am referring to? Electronic cigarettes, or e-cigs for short.

Now what is an e-cig?

…today the retail sales figures [for e-cigs] are around $1 billion… this could grow in the next few years to more than $10 billion.

You may have seen one. It looks like a real cigarette. But it’s very different.

An e-cig is composed of a mouthpiece, a liquid nicotine cartridge, a heating element and a battery. When the user inhales on the e-cig, the heating element is activated. The liquid nicotine cartridge is heated and creates a vapor. This is what the user inhales. It is odorless. It doesn’t contain any of the other chemicals or tar found in traditional cigarettes.

So why would a person use an e-cigarette? For one, recent studies indicate that there are significant health benefits.

What exactly are the health benefits of these futuristic devices?

Three come to mind. There is a noted reduction in side effects commonly reported by smokers. Some of these side effects are shortness of breath, dry mouth and headaches. Along with reduction of side effects, there is no secondhand smoke. The vapor that the user exhales quickly vanishes and does not appear to cause harm to bystanders. And lastly, it may be a successful way to quit smoking entirely.

I learned of these specific benefits from a recent study published by an Italian university. Their study was the first of its kind. They spent a year with 300 participants who were heavy smokers and had no intention of quitting smoking. At the end of the study, their results were remarkable. All participants noticed a reduction in the various side effects I mentioned. There was also a significant reduction in the number of real cigarettes consumed per day. While quitting altogether is certainly the healthiest choice, there is still something to be said about a product that reduces cigarette consumption.

The potential health benefits are still being evaluated. So far, the results do seem promising.

Now, along with the health benefits, e-cigs offer a few other benefits.

As it stands now, they are cheaper than regular cigarettes. Cigarette smokers who want their fix but don’t want to spend the money may decide to switch over based on price.

Health benefits, cheaper price and universal usability. By universal usability, I’m referring to where a user can smoke their e-cigs. They can be smoked indoors. Once again, there are no noted effects of secondhand vapor. The vapor that is exhaled has little to no odor. One report I read indicated that bar and club owners are becoming fans of e-cigs. Users who buy them are more likely to stay in the bar and consume more drinks than they otherwise would. This may add to the cool and convenience factor of these disruptive new products.

So what does the e-cig market look like?

It’s certainly changed in the past year. In April 2012, one of the big cigarette companies threw its hat in the ring. This was Lorillard, maker of Newport and other cigarette brands. They spent $135 million on the purchase of blu e-cigarettes. They’ve seen a lot of success with the brand. Sales have grown from $8 million in in the second quarter of 2012 to $57 million in the second quarter 2013. This is a gain of more than 600%. Lorillard claims they hold around 40% of the total e-cig market share.

Along with Lorillard, two other big players are privately held Njoy and RJ Reynolds’ Vuse. There are lots of smaller producers of e-cigs who have their own products as well.

The strongest catalyst I see for these companies is the growth and broad acceptance of e-cigs. With big players acquiring companies, it is clear to me that e-cigs are not a fad. They are the real deal. And as they say, a rising tide lifts all boats. Goldman’s report on e-cigs suggests that today the retail sales figures are around $1 billion. They project this could grow in the next few years to more than $10 billion.

There are, of course, risks to this growth. The most obvious is the involvement of the FDA. E-cig companies are anticipating that the FDA will get more heavily involved in regulating the e-cig market. This is a known risk currently being priced into e-cig stocks. If regulation is passed, this could actually help their stock price. It would grant a degree of certainty in the minds of investors. It could also have the effect of crowding out some of the smaller players. It may also have the effect of boosting consumer confidence in the e-cigarettes.

As for the e-cig market, I read an interesting report. Bonnie Herzog, a senior analyst at Wells Fargo, specializes in tobacco stocks. She’s been one of the prominent analysts closely monitoring the e-cigarette trend.

In her prior reports, she projected 2013 e-cig sales to be over $1 billion. Last week, she increased this estimate to $1.7 billion — a 70% increase. Good to hear!

Keep your eyes on this space, as e-cigs are sure to take a chunk of Big Tobacco’s market share.


Thompson Clark
for The Daily Reckoning

Ed. Note: The growth potential for e-cigs is just one of the disruptive technologies we’re tracking in Tomorrow in Review, a free service that details the world’s most exciting tech stories. Subscribers receive daily opportunities to discover just these type of companies… and how to profit from them. This is one of the most exciting times to be an investor. Take full advantage of that by signing up for Tomorrow in Review, for free, right here.

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