Juul Makes Being A Unicorn Look (Really) Good

Juul, the popular e-cigarette company, is raising a huge stack of money at a massive valuation that has both raised eyebrows and concerns. So is the company worth its valuation and the money it’s raising? And is it an ethical business? (Stories about teens vaping abound. However, they are coming at a time when teen smoking rates are at or near record lows.)

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We can’t answer the latter question here as we’re not equipped for it; however, we can take a stab at the former question. After all, it will be amusing if Juul is a better unicorn than most software shops.

Ready? Let’s go.

Economics

Juul’s rocketship growth isn’t new news, really. Back in November of 2017, Business Insider wrote up the company’s growth, noting that it generated $224 million in revenue “[o]ver the past year,” and it grew 621 percent in October of 2017 (roughly) compared to October of 2016.

That’s pretty fast growth to a huge chunk of top line. And per Axios earlier this week, the company’s growth has kept going.

Dan Primack reported that Juul turned in $245 million in calendar 2017, “up from around $60 million in 2016.” Primack went on to note three more metrics that caught our attention: Juul has projected revenue of $940 million in 2018, it has gross margins of 70 percent, and the company’s “2018 EBITDA projection is approximately $250 million.”

Holy hell.

This makes the company’s impending $1.2 billion raise against a $15 billion valuation a bit easier to understand. Here is some quick math on all that:

Year-over-year revenue growth from 2017 to 2018 (presuming projections are hit): 284 percent.
Implied end-of-year revenue multiple for Juul (presuming projections are hit and the $15 billion valuation holds): 16.
ARRG ratio (more on that here): 5.6.

Translating all that into English: the company’s revenue growth from 2017 to 2018 will be staggeringly quick from a roughly quarter billion dollar base. And although the company’s revenue multiple looks steep at the moment, it actually looks quite sane when you factor in growth (ARRG ratio).

Toss in the expected quarter billion in positive EBITDA and the whole company looks healthy.

We’ll have to do a bit more division and what not in the next section, but ask yourself: is there another tech company that can match those growth and revenue numbers with the same level of profitability? I can’t think of one that fits the bill.¹

Unfair Comparisons

Now we turn to the Bessemer Cloud Index. The Index tracks a host of public cloud companies, showing their combined performance compared to the various major indices and various financial metrics that it aggregates.

What comes out of the math is interesting. First, the average 2019 revenue projection for the companies in the Index is $951 million, darn close to what Juul is supposed to pull in this year (2018). And the Index companies produce an average gross margin of 72 percent—quite Juul-like, again.

Next, however, things begin to diverge. The average company in the Cloud Index is worth just $7.2 billion, far below Juul’s $15 billion price tag. But by paying more for Juul, investors are getting an expected growth rate of 284 percent from 2017 to 2018, which we can loosely contrast with the Index’s promised 2018 to 2019 growth average for cloud companies of 21 percent.

We are making an unfair comparison by using 2017-2018 numbers for Juul against 2018-2019 numbers for cloud companies. But as Juul is growing at a pace roughly 13.5 times as quickly as the contrasting average, I think that it’s fair to say that the growth gap is material and real.

Finally, the firms in the Index barely generate cash, let alone gobs of EBITDA. So even giving ourselves a bit of breathing room on a revenue multiple comparisons, Juul is far and away a generator of high-quality top line than SaaS and cloud companies. I would wager that’s due to far lower sales and marketing costs, but that’s just a hunch.

To sum quickly: Juul’s economics look great; when growth is taken into account, its revenue multiple looks pretty reasonable; and compared to some leading cloud companies, it’s very healthy as well.

Juul: The unicorn you wish your company was.