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When the recently listed Ispire Technology Inc. (NASDAQ: ISPR) declares its Latest quarterly results On February 20, investors were disappointed with its story about the huge potential of the e-cigarette market.
The stock price fell nearly 10% from last month Although revenue rose 31% to $41.7 million in the three months ended Dec. 31 (the company’s fiscal second quarter), revenue will continue to grow in the coming days.
But unlike many struggling e-cigarette stocks, Ispire’s shares have been rising steadily since listing on Nasdaq last April, and are currently trading about 40% above its $7 IPO price.
The company’s trailing price-to-sales (P/S) ratio of 3.85 is even comparable to the much larger Altria Group’s (MO) ratio of 3.54, and also ahead of Shenzhen-based Small International (OTCPK: SMORF). .
Some clues about the lofty valuation emerged a few days later when Ispire co-CEO Michael Wang boasted. In a presentation by investor Shadd Dales, he talked about his company’s potential for explosive growth.
Specifically, he said Ispire’s revenue could grow fivefold to $1 billion within three years, and could exceed $2 billion in two years.
“Our traditional (tobacco) products will continue to grow at a healthy rate, but the real growth will come from the cannabis industry,” Wang said.
In formal guidance for fiscal 2024, which ends in June of this year, Ispire forecast that its cannabis vaping products will generate $80 million to $90 million in revenue, an increase of 100% to 125% from the previous year.
The company expects annual revenue from its tobacco e-cigarette products to reach $95 million to $105 million, a growth of 33% to 47%.
In an e-cigarette environment where most companies are struggling under increasingly tight regulations, why are investors relatively optimistic about Ispire? What problems might arise? Why weren’t investors more enthusiastic about the company’s latest earnings report?
The answer to the first question is simple. Ispire is quickly becoming a member of the expanding U.S. legal cannabis market. It only sells cannabis hardware in the United States, which is legal at the state level but not yet at the federal level.
According to Tobacco Report, annual sales of e-cigarettes in the United States are currently approximately US$6.8 billion, of which sales of e-cigarette parts amount to US$700 million.
But Euromonitor estimates that the global market for cannabis vaping products will be even larger, reaching $10.5 billion by 2025, with most of it in the United States and Canada.
While the market is large, especially for cannabis, Ispire is currently a smaller player. Its cannabis vaping revenue grew 149% to $19.5 million in the three months to December, with total revenue for the quarter coming in at $41.7 million.
Its revenue rose 43.7% year-over-year to $84.5 million in the six months ended December. But its cannabis hardware revenue grew 133% in six months to $36.9 million.
Revenue from its tobacco e-cigarette products, which are sold to 30 countries in Asia and Europe but not the United States or China, increased just 11% in six months to $47.6 million.
Chinese roots
The company that eventually produced Ispire was founded in 2011 in the emerging city of Shenzhen in South China as a tobacco e-cigarette hardware manufacturer.
Ispire was later formed and is headquartered in Los Angeles, but its manufacturing arm and a senior executive remained with the original Shenzhen company, Shenzhen Yijia Technology Co., Ltd.
Ispire launched cannabis products in 2020, and by fiscal 2022, these products accounted for 22.6% of its revenue.
So, what’s not to like about this company? First, it’s losing money, including $4 million in the six months to December.
Ispire’s accounts receivable nearly doubled to $22.7 million at the end of December compared with six months earlier, a sign that many customers may not be able to pay their bills on time.
It’s also burning cash rapidly, with net cash falling 80% to $17.5 million at the end of December from $84.3 million a year earlier.
Wang said his team was “working hard” to resolve the accounts receivable issue, noting that the expiration of certificates of deposit in February had boosted the company’s cash to $27 million. “Obviously, the cash burn is to fund the growth of the company,” he said.
There are other potential issues, including an earlier conflict between U.S. and Chinese securities regulators over the former’s access to accounting records of U.S.-listed Chinese companies.
Ispire’s status as a U.S. company with major operations in China puts it in a gray area, although U.S. and Chinese regulators have now resolved most of their differences through an information-sharing agreement signed in 2022.
Ispire’s China business delayed its initial listing plans, not because of geopolitics, but because of China’s domestic regulatory crackdown on the e-cigarette industry in 2021. And in the current U.S. election year, there’s always the possibility that Ispire’s China business could become a public company. Post the question again.
Ispire has tried to play down its ties to China, building a new factory in Malaysia and considering building a factory in California.
But as of now, 95% of the company’s e-cigarette products are purchased from Yijia Technology, which is owned by Ispire chairman and co-founder Liu Tuanfang, who is based in China and is also the chairman of Shenzhen Yijia.
Ispire was originally named Aspire, which is the brand name of Ispire tobacco e-cigarette hardware. The technology was invented by Liu, who together with his wife Zhu Jiangyan owns 61% of Ispire.
The original Aspire Global is headquartered in Shenzhen and applied to be listed on Nasdaq in 2021 with a valuation of US$135 million.
But the company withdrew its application after China’s tobacco regulator introduced new rules requiring domestic e-cigarette makers to seek overseas listings. In May 2022, the company withdrew its application.
Ispire may have been formed as a separate U.S. company to circumvent this requirement.
All of this suggests that Ispire is a fairly complex company that is less risky for foreign investors than a traditional Chinese company, but there are still some China risks.
That might explain why the company’s shares have performed relatively well since its IPO, even though most U.S.-listed Chinese stocks have underperformed.
That could also explain the tepid response to the latest results, as investors pocketed some of the post-IPO proceeds.
Reveal: not any
