Altria (NYSE:MO) wants to you to know the reason it bought a 35% stake in Juul Labs for $12.8 billion is that the electronic-cigarette maker is generating an insane amount of money. Juul made over $1 billion in sales in 2018, five times what it did the year before, and it's sucking all the oxygen out of the room with a 75% share of the market.

Yet as incredible as those numbers are -- and CNBC says the sales figure is actually closer to $1.5 billion -- it's possible Altria bought in at the top of the market. The ever-changing nature of the e-cig industry, along with the enhanced scrutiny the Food and Drug Administration is visiting on the industry in general and Juul in particular, could cause a dramatic reversal of fortune sooner rather than later.

A Juul Labs e-cig and flavor pods

Image source: Juul Labs.

A never-ending horse race

Juul Labs burst on the scene just a few years ago with a completely different kind of electronic cigarette. Its Juul device uses nicotine salts in its e-liquid rather than so-called "freebase" nicotine, and though other e-cigs also use salts, Juul has a proprietary formulation that includes benzoic acid, which creates a smoother taste and allows for higher levels of nicotine in the e-liquid. 

Whether it's the stronger punch or the cool thumb-drive shape of its design, the Juul has become the e-cig of choice among teens -- and that's drawing unwanted attention from regulators.

The FDA says there's an "epidemic" of teen usage of e-cigs, and it demands manufacturers come up with a way to combat their access to the device. The agency itself handed down new rules that proscribe where e-cigs can be sold, allowing only tobacco, mint, and menthol flavors to be sold at convenience stores, gas stations, and other locations where the general public can buy them, and limiting fruit and dessert flavors to adults-only stores, such as vape shops.

If the agency imposes even more restrictive limits on e-cigs, or on Juul itself, the device could quickly fall out of favor. In fact, the history of e-cigs shows that's likely to happen anyway and suggests Altria paid way too much for a piece of Juul Labs.

E-cigs have been around for only about 15 years, but in that time, industry leadership has changed hands numerous times:

  • blu eCig was one of the first devices to gain widespread usage; it once captured 46% of the e-cig market.
  • It was sold to Imperial Tobacco when Reynolds American bought Lorillard because the former was pushing its Vuse e-cig, which quickly took over the lead and had around a 40% share as blu faded away.
  • Now Juul has blown away the competition, and Altria even chose to stop trying to sell its own e-cigs, pulling its own MarkTen and Green Smokes brands off the shelves.

And beyond regulatory worries, new competition could knock it off its throne. Philip Morris International (NYSE:MO) is awaiting an FDA decision on whether its heated-tobacco IQOS electronic cigarette will be approved for sale in the U.S., possibly with a reduced-risk label. Particularly if the latter happens, the device that will be marketed under Altria's Marlboro brand could very well become the top-selling e-cig on the market, because it gives the closest approximation to the traditional cigarette experience.

Check out the latest Altria earnings call transcript.

Keep a close eye on the FDA and e-cigarettes

Considering the FDA is angry at Altria for investing in Juul because the agency considers the move a decision by both companies to backtrack on their commitment to limiting teen access to e-cigs, there may be more regulatory trouble to come. Altria's move to quell investor and analyst concerns by hyping Juul's billion-dollar sales achievement may one day be seen as the point the e-cig maker hit its high-water mark.