Haypp Group is a prominent e-commerce company and retailer of tobacco-free nicotine pouches, also known as white snus, as well as traditional snus online. The company operates multiple sites in Europe and North America, with its largest markets still being Sweden and Norway. However, the significant potential lies in the global growth of the immensely popular white snus. Founded in 2009, the company has 200 employees and is headquartered in Stockholm.
Gavin O’Dowd, an Irishman, has been the CEO since 2017. He previously worked as the CFO at the tobacco giant British American Tobacco (BAT). O’Dowd owns 3.4% of the capital in Haypp, equivalent to a value of 55 million SEK.
In 2019, the e-commerce sites Northener and Snusbolaget merged to form Haypp Group. GR8 Ventures, owned by the founders of Snusbolaget, Henrik Nordström and Linus Liljegren, holds 13% of the company. E-commerce veteran and major shareholder from Snusbolaget, Patrik Rees (founder of Bygghemma), owns 12%. The founders of Northener, Frank Svandal and the Orvelin brothers, still retain 9% ownership.
The leadership and board together own over 32% of the company. The fund ownership is low, only 10%, likely due to many fund companies’ ESG profiling. Foreign ownership accounts for 40%, and the stock has been popular among retail investors in the USA seeking to capitalize on the nicotine pouch trend.
Haypp divides its operations into three segments: Core (71% of revenue) for snus and nicotine pouches in Sweden and Norway, Growth (28%) mainly for nicotine pouches in the USA, UK, and DACH, and Emerging (1%) for other products in existing markets, primarily e-cigarettes. Nicotine pouches are the company’s main product, with about two-thirds of sales volume coming from this category. Flavored white snus is a significant portion of sales, with 99 out of 100 cans having some form of flavoring. The customer base is evenly distributed by gender, with young adults overrepresented.
The typical Haypp customer is price-sensitive and makes bulk purchases on the company’s websites. The average order value is 687 SEK, equivalent to buying more than 20 cans at a time. Haypp sells leading brands like Zyn from Philip Morris (Swedish Match), Velo and Lyft from BAT, as well as Skruf (Imperial Brands) and On! (Altria).
Regulations for the sale of nicotine pouches vary by country. In Sweden, nicotine pouches are classified as tobacco-free nicotine products with an 18-year age limit and marketing restrictions to protect youth. Selling white snus does not require a permit, unlike tobacco snus. However, there is a notification requirement to the local permit unit in the municipality where the company operates. Haypp falls under the jurisdiction of the Stockholm municipality’s permit unit.
In the USA, nicotine pouches are in a regulatory gray area, with the FDA (Food and Drug Administration) not yet establishing clear regulations for these products. Nicotine pouches are currently regulated under traditional tobacco product rules, including restrictions on marketing to and sales to individuals under 21 years old. Despite the lack of explicit federal rules, individual states have introduced their regulations for nicotine pouches, such as flavor restrictions.
Due to restrictions on advertising nicotine products in popular online channels like Google or Instagram, many new customers find online stores through search engines like Google. Being early to market has allowed the company to gain significant market share. At a capital market day in 2023, the company estimated its market share for white snus online and overall, confirming its position as a leading player in its markets.
While the Swedish and Norwegian markets are mature and well-developed, many markets still have low online penetration. The future path involves capitalizing on the significant market growth expected in nicotine pouches.
Over the past five years, Haypp has grown by an average of 47% per year, driven by strong organic growth and acquisitions of e-commerce platforms. The company does not explicitly report organic growth. Since going public in Q3 2021, growth has been around 19% per year, with Core segment growing by approximately 10% per year and Growth over 50%.
Despite being a low-margin business, the company has steadily improved its gross margin, currently around 15%. Achieving a large scale is crucial due to the nature of the business. While the company has balanced around break-even since 2018, recent years have seen a gradual increase in operating margin, reaching 3.5% in Q3 2024. The company emphasizes an adjusted earnings measure excluding all amortization and depreciation of intangible assets. Their financial goal for an operating margin (5-7%) should be achievable in the long run, although it may not be reached by 2025.
The stock experienced a significant decline after the release of the Q3 2024 report, with the price down approximately 25% since then. This was triggered by authorities in San Francisco filing a lawsuit regarding the sale of flavored nicotine products, which is prohibited in the state. Haypp’s US subsidiary and three other online stores are defendants. The company set aside legal costs of 11 million SEK in the quarter, which are not included in the adjusted earnings.
The new flavor restrictions in California, which also apply to online sales, led Haypp Group to temporarily suspend its operations in the state. This hiatus could be detrimental as the business for unflavored nicotine pouches is almost non-existent. Currently, there is no indication of how long the pause may last. This pause affects about 15% of the sales volume in the USA, or approximately 3% of Haypp’s total volume.
It is not uncommon for sales to be paused, as has happened in other states, but these instances were not reported by the company as they involved small volumes. California is known for being more regulation-heavy, while other states may have more lenient regulations. The stock was already performing poorly before the news from California, partly due to a shortage of Zyn in the US, which accounts for about 35% of Haypp’s US sales (6-7% of total). The company expects this shortage to impact growth for the next two quarters but anticipates improvement in the first quarter of 2025.
The company’s story is heavily tied to the US market, explaining the stock’s decline on these news. The regulatory challenges in Sweden regarding online sales of traditional snus pose a risk that needs monitoring. However, the company does not expect this sales channel to disappear in the near future and includes it in their scenarios.
In terms of forecast and valuation, the underlying growth for nicotine pouches is expected to remain high. Core growth is projected to be at least 10%, while Growth should achieve 35% underlying growth. Considering the events in California, sales from this region are not factored into the forecast. With the Zyn shortage in mind, growth for 2024 is estimated at 17% and 16% for 2025, accelerating to 19% the following year. The company is not likely to optimize for high margins in the near term, and investments in Emerging may impact margins slightly. A 4.5% adjusted operating margin is projected by the end of 2026.
In an optimistic scenario, where mature margins and higher growth are assumed, with a slightly higher multiple, the stock has over 100% upside. A pessimistic scenario, assuming Betsson’s valuation and flattened profitability, could lead to a 33% downside. However, there are additional risks, such as a complete ban on flavored nicotine pouches in key markets, that are not captured in these scenarios.
The future for the company is challenging to predict, with regulatory hurdles likely to persist. While the potential is significant if everything goes right, decisions on permissions may weigh on the stock in the near term. Haypp is recommended for those seeking exposure to the nicotine pouch market and can handle a higher level of regulatory risk.