What Are E-Cigarettes?

What exactly is an e-cigarette? Invented in China in 2003, e-cigarettes function by vaporizing a liquid solution into what resembles smoke. These battery-powered devices generally feature liquids that contain nicotine but lack many of the other harmful ingredients that are found in traditional cigarettes.

Given that they are still potentially addictive due to the presence of nicotine the prospects for increasing regulation is high going forward. But this doesn’t mean e-cigarettes do not represent a unique opportunity for investors and consumers alike. The e-cigarette market is growing rapidly, coming in at more than an estimated $1 billion in 2013, up from around $500 million in 2012. This growth is also expected to continue -- industry analysts estimate that e-cigarette sales will reach $1.5 billion in 2014 and a whopping $10 billion by 2020. The opportunity for e-cigarettes is huge given their stature as an alternative to traditional cigarettes, which is a $90-billion-a-year industry.

Such a potentially huge market is bound to have winners -- and losers. Investors will need to tread carefully in this fast-growing but constantly shifting industry. Current players in the e-cigarette market include private producers that fill convenience store shelves with numerous options, several small speculative public companies that trade over the counter, and now Big Tobacco companies as well.

While some of the smaller players will no doubt be around in the future, the major tobacco companies are all jockeying for position and rolling out their own e-cigarette brands. Current market leaders include Lorillard’s (NYSE: LO) “Blu” brand of e-cigarette, Altria’s (NYSE: MO) “Mark Ten” brand, and Reynolds American’s (NYSE: RAI) Vuse e-cigarette. All in all, investors have many ways to invest in the future of this potentially enormous market.

Investing in E-cigarettes

E-cigarettes have the potential to be a disruptive -- and profitable -- industry. However, as with any new consumer product or technology, there are risks. Investors will need to tread carefully in this fast-growing market or risk the sands shifting beneath their feet. The production of e-cigarettes is currently carried out by dozens of companies that fall under one of three categories.

The first is privately held e-cigarette producers, the best example of which is Scottsdale, Ariz., based NJOY. Unfortunately for the average investor, investing in one of the numerous privately held e-cigarette companies simply isn’t an option. Such moves are typically reserved for high-net-worth investors and fund managers. Case in point: NJOY just received investments from Facebook billionaire Sean Parker and venture capitalist Peter Thiel, valuing the company at $1 billion.

The second type of e-cigarette producer is available to the average investor, but with a catch: These companies can be extremely risky. These players almost all have shares that trade over the counter and should be classified as extremely speculative.

This leads us to the third type of e-cigarette manufacturer. Fortunately for Foolish investors, this option is not only available to everyone but happens to be something most of us are familiar with: The major tobacco conglomerates. Big Tobacco is fully aware of the threat that e-cigarettes pose to their traditional business and have concluded that the only way to beat them is to join them. Anyone looking to invest in the future of e-cigarettes need look no further than these enormous conglomerates as they benefit from the distribution channels, market understanding, and capital to take advantage of this potentially game-changing consumer shift away from traditional cigarettes. 

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