TPB 8.21.26

My model assumes they can maintain the in-store share they have now in the stores they enter. Ultimately, I can tweak this over time, but I start the model with essentially ALP, I believe, in the stores that it's in, has an 11% share. And FRE, in the stores that it's in, has a 6% share. You do that by looking at Nielsen data and dividing total sales in the nicotine pouch market by the total number of stores. Then you take the total sales for ALP and FRE and divide them by the number of stores where they're present. Those are the shares you come up with. I assume they can maintain that share. I don't assume that they grow that share. But they have a market regardless of the store that they’re in, right?

There are really 3 different markets that I consider. There are tracked channels, online channels, and untracked channels. And Turning Point with ALP and FRE is the dominant player, and we estimate it has about a 56% share of online sales in the United States.

With respect to tracked channels, that's easy enough to see. They have a 2% share today. And for untracked channels, we estimate it's about a 10% share. And tracked channels are about, call it, 190,000 stores. Untracked channels are about 60,000 doors, including vape shops, tobacco shops, some independents not in the scanner data, and convenience stores. So several things don't show up in the Nielsen data, and we don’t know the capture rate relative to Nielsen, but we assume it's about 70%.

So they've had the least traction in the track channels. Now, it's changing. Right now, FRE has about 66,000 doors that they're in, but that's not a completely reliable figure. That's based on a scrape of their store locator. And I can tell you, because we've done checks on hundreds of locations that are in the store locator, and it has been the case in the past, which I suspect is still the case, that a lot of those stores don't have product.

In some cases, they had it, they sold out, and it wasn't restocked. In some cases, they never had it. That nuance was much more the case early on. Today, I don't know. We still need to run incremental checks because we saw a large increase in the scraped data earlier this year. They can reach 70% of both the tracked and untracked channels from today through the end of 2030. So you're thinking about it in a way that's very similar to me.

Well, 11% here for ALP, and then 6% share for FRE in those stores. Right now, they have a mid-single-digit share. They likely have a 5% or 6% share of the aggregate market today.

Yeah. They maintain share, acquire stores, and grow with the market. As the market grows, you're maintaining share. And that makes sense, right? So I use a matrix where I say the market grows at 10%, 20%, or 30%. In this case, I assume they have the share they currently have in stores, and then they reach 70% of the stores in Nielsen. As for the untracked channels, I assume the relationship between tracked and untracked channels remains relatively constant in terms of the percentage split between the two.

Let's see, if you were in 70% of the stores without that, I think it'd be higher because you have to understand that online, they're still going to be dominant. And online has been growing for them faster than the market. Now, I assume in my analysis that online just grows with the market. But online sales still account for around half of the sales. I'd have to go back and look, but I mean, it's huge for them.

So if you assume online accounts for half of their sales, that's about a 2.5% share. You’d gross up their share by the store acquisition and the relative shares within each store, then add 2.5%, assuming online share doesn't grow. It's conservative because it assumes they're not gaining incremental share online, and that online should gain more share of the total over time. Because online, I think, has a lot to do with awareness that it's available online. And I think it's a different product from cigarettes, aimed at a younger demographic.

Well, let's talk a little bit about the nature of nicotine pouches versus cigarettes. Most people who buy cigarettes don't buy cartons. Most people buy a couple of packs because they're always looking to quit, right? With nicotine pouches, I don’t think that there's the same impetus to want to stop using them. This was true a year ago, and I don't know if it's still true, but management confirmed that one-third of their online sales are via subscription.

Several people in the space look at Haypp Group (HAYPP.ST), and Haypp Group says there's a lot of experimentation and that users often switch, so variety matters. Of course, they have the largest variety because they’re online, which plays well into their bull case. Then, they can provide it at a lower price because they take a lower margin than the retailer does. There's also the convenience of having it shipped online.

But in Sweden, 33% of the market is online. Now, that’s different than the United States because it's less of a car culture. And if you look at convenience stores or the equivalent thereof in Sweden, per capita versus what they are in the United States, there are much fewer of them, right? So, because we have a car culture, convenience tends to have a larger share. I don't see a reason why online couldn’t go from about 4% today to 10% eventually. So that's a lot.

Right. So now, will Turning Point remain the largest? I mean, when I say the TAM online, I'm including third-party resellers. The Haypp Group handles about 2,000 orders a day. For ALP alone, that's 3,500 orders a day. And FRE is just around 700 orders a day. So the Haypp Group, between Nicokick and Northerner, their two online brands in the US, accounts for about 75% to 80% of the total third-party market.

We know that, for one, the larger companies don't sell anything online unless they do it through the Haypp Group. For smaller brands like Lucy, Sesh, and Joey, Lucy does about 2/3 as much online as FRE does, so it's very small. Lucy's the second-largest online player. And originally, I think they were just native online.

So Turning Point gains a lot of advantages from that position. Some very interesting developments are happening with Zone Labs, Frontier, and Drifters. I mean, essentially, those are white-label products. Drifters and Zone are white-label Juice Head, and Frontier is white-label Lucy. So they're letting competitors partner with them to provide these specialized brands and increase volume because of the power of their online presence.

I think what happens is psychological, and this is one thing I think people misunderstand about nicotine. It’s a very addictive drug. When you go for a period without having it, it's like being hungry. And when you have that relief from your nicotine addiction, you associate the relief with whatever it is that it's providing you with. So you start associating it with little nuances, like the flavors and the feel of the pouch. So people tend to be brand loyal. For regular users, my view is based on my experience and conversations with industry professionals.

But because nicotine pouches are a very new phenomenon, early on, I think if you're not a regular user, then there's more room for experimentation because you just don't have the addiction. There's more room for switching if you have a clearly superior product.

We had a 3% position in Turning Point in 2024. I tried all the different products, and FRE was better. It's because it was the only moist pouch at the time. We took that 3% and made it 5%. And then ultimately we added enough capital that invested capital would be 6%. Today, that has grown into the largest position in the book.

What initially turned me on was the notion that the product wasn't just good, but superior. You can see in the Nielsen data that, among ZYN, the original On!, and VELO Plus, VELO is the superior product and has taken share from the others. And most of those share gains have come from dry to moist. That's been a big advantage for Turning Point because it has a moist pouch.

Some people don't like ALP and FRE as much as they like VELO because of the mouthfeel. Now I'm biased because I also own the stock. I have that extra, incremental psychological reinforcement, and I've been pressing Turning Point to help their customers understand that they can own the stock.

Some data suggests that if you own equity in a product that you consume, you consume like 30-40% more of the product. Then you have this beautiful relationship where you have somebody that's an advocate for both the stock and the product. That can help with your marketing and customer loyalty. And then of course, you have a more loyal shareholder that's less focused on the next quarter. To clarify, only 5% of the stock is owned by retail.

Well, so one thing that really depresses the profitability for Turning Point is their production costs. They're much higher than their competitors because they use the Indian co-packer. So I use an earnings multiple, and depending on the growth of the market, which really drives the mature state for Turning Point, at a 10% growing market, I value it at 27.5x earnings, and that gets me to $480 a share. I believe 34x earnings if I use the 30% growth, and I get to $1,800 a share if I get there. And that's assuming no change.

And that would probably be low. I think, if you have a market that's growing that rapidly, I mean, in this day and age, you never know because we have so much nonsense out there. But I’d be conservative in those numbers if you have a market that continues to grow at a 30% rate. The CAGR, of course, has been much larger for the last 5 years than 30%. I want to say it's something likemid-40s. But it's off a smaller base.

So kind of how much do you think nicotine usage grows in the United States, and how much share are they able to take from cigarettes? But the total market for nicotine in the United States is like $50 billion, and it’s clear cigarettes are going to continue to decline. So the battle is really between vaping and nicotine pouches. And nicotine pouches, in my mind, are far superior. They have more use cases, fewer health issues, and are much more discreet. So I think ultimately it seems likely at some point in time we'll see nicotine pouches overtake cigarettes.