According to Grand View Research, the electronic cigarette and vaping market in the U.S. is expected to be worth $47.1 billion by 2025. This represents a compound annual growth rate between 2019 and 2025 of roughly 25%, with this estimate offered by Grand View a mere two months ago.
However, the e-cigarette and vaping landscape has changed pretty dramatically over those two months.
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Vape-related health worries are picking up steam
In recent weeks, the Centers for Disease Control and Prevention has identified 530 confirmed cases of mysterious lung illnesses in vape users. Of these 530 cases, seven people have died. For the time being, researchers and doctors have no concrete ideas as to what's causing these illnesses, or if these lung issues might be acute or lead to long-term problems.
Some folks have suggested that a lack of regulation has allowed low-quality, black market vape liquids to infiltrate the marketplace, leading to these illnesses in most U.S. states. Meanwhile, a joint study of afflicted patients in Wisconsin and Illinois revealed that a vast majority had used cannabis products in their vape device meant for tobacco products. None of these hypothesis proves anything, but it clearly has the industry and vape users on edge.
Of course, it's not just the tobacco industry that could feel the pain of these vape health concerns. To our north, Canada is readying to launch a host of alternative cannabis products by mid-December. Among the numerous derivative products set to hit the market, vapes are projected to be a top seller. In the meantime, Cowen Group opined in March that vapes and vape accessories would eventually comprise 23% of total U.S. marijuana sales.
It's pretty clear that vape-related health concerns aren't going away anytime soon, and that it's liable to take researchers time to figure out what's behind these mysterious lung illnesses. That creates a scenario where there will be (at least in the near term) clear losers, and winners, in the North American cannabis space.
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Vape device retailers and vape-focused pot stocks may suffer in the short term
Without question, vape device makers look to be at the highest risk of seeing negative repercussions from the ongoing health scare in the United States. Worse yet, vaporizer retailers were already struggling prior to the rise of these mysterious lung illnesses. Two particular names that come to mind are Greenlane Holdings (GNLN 5.06%) and KushCo Holdings (KSHB).
Greenlane is an accessories retailer of anything and everything having to do with tobacco and cannabis, so it's not just about vaping. It has access to more than 11,000 retail doors throughout North America, making it a clear leader in the accessories department for the two biggest cannabis markets in the world. However, Greenlane's success has largely been tied to its early stage deals with vape companies, including well-known device maker Storz & Bickel, which is now owned by Canopy Growth.
Then there's KushCo, which is generating the bulk of its sales right now from the sale of vaporizers. Already being hit with higher costs from tariffs -- KushCo brings its vape products and some of its packaging in from China -- KushCo is at clear risk of sales weakness if this health scare persist. Thankfully, KushCo does have other sources of revenue, including packaging and branding solutions, as well as being a supplier of hydrocarbon gases and solvents to the pot industry. Nevertheless, device makers are clearly in the weeds right now, and not in a good way.
Marijuana stocks with a laser focus on vapes could also struggle. A good example here would be Cronos Group (CRON 1.24%), which netted a $1.8 billion equity investment from tobacco giant Altria in exchange for a 45% nondiluted stake in the company. Cronos plans to lean on its equity partner for its expertise on marketing to consumers and branding its products.
The idea had been that Cronos would work with Altria, which also has a 35% stake in popular vape device maker Juul, to rapidly boost vape sales in Canada, and eventually throughout North America. But Juul recently received a warning letter from the U.S. Food and Drug Administration over its marketing practices that, when combined with these mysterious lung illnesses, could really stymie Cronos Group's ability to thrive.
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Where there's pain, there's usually a business (or three) that gains
On the flip side, it's quite possible that we could simply see cannabis vape revenue shift to different alternative consumption products. Namely, we could see an uptick in the amount of nonalcoholic cannabis-infused beverages, edibles, concentrates, and/or topical products that are sold in Canada and in select U.S. states.
The issue, of course, is that with vaping projected to be such a large component of cannabis sales, pretty much every pot stock has exposure. This is where dabbling in the ancillary industry could prove worthwhile.
For example, extraction-service providers Neptune Wellness Solutions (NEPT 24.07%), MediPharm Labs (MEDIF -1.55%), and Valens GroWorks (VLNS) could be notable beneficiaries of vape-related health concerns. With consumers worried about vape products and their potential long-term health impact, the logical expectation is that consumers will shift their consumption to the alternative options noted above. Each and every one of these derivatives requires extraction from the hemp or cannabis plant, which is the service that Neptune, MediPharm, and Valens provide for their clients.
To date, all three have snagged impressive intermediate-term deals. Neptune Wellness has most of its Canadian extraction booked out for the next three years following deals with Tilray and The Green Organic Dutchman. MediPharm snagged a deal with Cronos Group that could be worth up to $60 million over a period of 24 months. Then, there's Valens, which has two-year agreements in place with Tilray and HEXO.
The point is that cannabis stocks very much need the high margins that derivative products bring to the table. While a mysterious lung illness associated with vaping is highly unfortunate, it's not going to slow the resolve of pot stocks to push into alternative consumption options. Rather, they're liable to simply shift what products they focus on, based on how consumers alter their demand. No matter what happens, it's highly unlikely that demand for the resins, distillates, and concentrates being supplied by Neptune, MediPharm, and Valens will be impacted by this health scare.
