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Fidelity Fund Slashes Value of Its Juul Stake by Almost 50%

Miles Weiss, Sophie Alexander and Donald Moore

(Bloomberg) -- Fidelity Investments slashed the estimated value of its stake in Juul Labs Inc. amid a government crackdown on the e-cigarette company.

The Fidelity Blue Chip Growth Fund disclosed online that the value of its Juul shares plunged about 48% during September. The fund held almost two-thirds of the 4.1 million Juul shares that Fidelity reported owning on a combined basis at the end of July.

The surging popularity of vaping had lifted Juul’s valuation to $38 billion in December, when Altria Group Inc., which sells Marlboro cigarettes in the U.S., acquired a 35% stake. But Juul’s success led to criticism that the e-cigarette company is responsible for a jump in teen vaping, an escalating public-health crisis marked by the outbreak of a mysterious lung disease. Altria may follow Fidelity’s lead with a writedown on its Juul stake when it reports earnings Thursday morning.

Fidelity is one of the largest money managers to benefit from early bets on closely held startups such as Juul, We Co. and Uber Technologies Inc. that blossomed into unicorns, the term for private companies valued at $1 billion or more. The firms have since seen their once-lofty valuations tumble this year, forcing Fidelity funds to write down stakes that had previously enjoyed huge gains.

“Valuing privately held firms is arguably much trickier than more liquid stocks that are held by the public,” said Robby Greengold, a Morningstar Inc. analyst who tracks Fidelity funds. “Juul has been a big driver of returns for several Fidelity growth strategies.”

The value of Fidelity Blue Chip’s Juul stake, comprised of roughly 2.67 million common and preferred shares at the end of July, fell to $386 million from $738 million during September, according to the fund’s website. In a separate commentary, the fund said that Juul was the largest drag to returns during the third quarter, when Fidelity Blue Chip declined 2.49%. Its benchmark, the Russell 1000 Growth Index, rose 1.49%.

“One stock decision in particular hurt by far more than any other: electronic cigarette maker Juul Labs,” Fidelity Blue Chip said in its quarterly fund review, adding that the closely held company lowered returns by 122 basis points. “The valuation of Juul, which is not publicly traded, fell this period as the company faced myriad regulatory challenges.”

Charles Keller, a Fidelity spokesman, declined to comment. Sonu Kalra, the portfolio manager for the $26.7 billion fund, didn’t immediately return a telephone call.

The Juul investment had been a coup for the blue chip fund, which acquired most of its stake at an average cost of $6 a share beginning in 2015, according to regulatory reports. Fidelity estimated that the shares were worth $285 each at the end of July, prompting Kalra to write in a shareholder report that Juul “was by far the fund’s biggest relative contributor” during the fiscal year.

Altria Deal

Altria’s investment in December turned Juul into one of Silicon Valley’s most valuable private firms, making co-founders Adam Bowen and James Monsees the world’s first e-cigarette billionaires. Fidelity’s latest valuation suggests Juul’s total market value is $17.5 billion, a 54% drop from when Altria bought its stake. Juul and Altria didn’t respond to requests for comment.

“I think there’s a good chance that they take a significant writedown here in the third quarter, but if they don’t, it will almost certainly come in the fourth,” Blooomberg Intelligence analyst Ken Shea said in a phone interview, referring to Altria, whose earnings report is scheduled to be released before the market opens Thursday.

Altria could also delay a potential writedown until May, when the FDA is expected to decide whether to authorize various e-cigarette products, Shea added.

“If they’re approved by the FDA to remain on the market, maybe there’s not a material impairment,” Shea said. However, “if they wait that long and they do not get FDA approval, that would be a very material hit, and an obvious signal that they need to take a writedown.”

FDA Troubles

The pressures on Juul intensified last month, when the Food and Drug Administration accused the company of marketing its product as a safer alternative to tobacco without getting the requisite government approval. President Donald Trump said his administration would increase its oversight of the vaping industry. Former Altria executive K.C. Crosthwaite replaced Kevin Burns as Juul’s chief executive officer in September.

“It’s very hard to anticipate” these types of regulatory risks, said Alfred King, vice chairman of Marshall & Stevens, a Los Angeles-based valuation firm. “If Fidelity knew the FDA was going to come down on Juul, they would have sold the stock earlier.”

Juul plans to cut 10% to 15% of its workforce amid stricter vaping rules, a move expected to affect as many as 585 workers. The company has also said it plans to suspend all broadcast, print and digital product advertising in the U.S. It has been accused of targeting teens with vaping flavors like mango, mint and creme brulee.

There is a potential bright side for Altria if the scrutiny of Juul and vaping grows. Michael Lavery, an analyst with Piper Jaffray, said in a note that recent data shows regular cigarettes may be benefiting from the vaping scare. He said IRI research reveals deepening declines in e-cigarette sales, while the pace of combustible cigarette volume drops has remained steady.

--With assistance from Tom Maloney.

To contact the reporters on this story: Miles Weiss in Washington at mweiss@bloomberg.net;Sophie Alexander in New York at salexander82@bloomberg.net;Donald Moore in New York at dmoore71@bloomberg.net

To contact the editors responsible for this story: Pierre Paulden at ppaulden@bloomberg.net, Jonathan Roeder

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