The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Corrects to say that Altria spun off Philip Morris in 2008 in paragraph 6.

By Sebastian Pellejero

NEW YORK, July 22 (Reuters Breakingviews) - The smoke-free future is looking a little hazier. Tobacco peddlers like Philip Morris International PM.N are desperate for a winning smoke-free product as sales of deadly cigarettes decline. Its nicotine pouch brand Zyn is one of the most promising candidates. Yet even strong growth reported on Tuesday wasn’t enough to satisfy investors. Missing expectations, no matter how slightly, casts doubt on whether the Marlboro maker can still command brand loyalty. After all, investors have seen Big Tobacco fumble a rising hope before.

Shipments of Zyn grew 24% year-over-year in the second quarter, to 190 million cans. Problem is, that was below analyst estimates of 204 million, according to Visible Alpha data. The shortfall was enough to send Philip Morris’s shares down over 8%, knocking $13 billion off its valuation.

It makes some sense considering Zyn’s stunning 53% growth in the first quarter. The company’s shares trade at around 23 times next year’s earnings, a valuation more befitting an in-vogue, high-growth consumer business than one selling a poisonous product. That reflects the success, thus far, of its pivot: some 40% of revenue now comes from smoke-free sales.

Philip Morris gained the pouch brand when it acquired Swedish Match in late 2022 for $16 billion. It was a well-timed move: Zyn sales volume has more than tripled from around 198 million cans in 2021 to 644 million in 2024, with 90% sold in the Americas.

Assuming a price of $5 per can, that implies nearly $2.9 billion in revenue from the Americas alone. Adding international sales probably pushes the global total above $3 billion. On a multiple of 10 times sales, similar to other growing consumer brands, the unit’s standalone valuation would be $30 billion, nearly double the price paid to acquire it.

The issue is sustaining this success under tough conditions. Altria MO.N, which spun off Philip Morris back in 2008, once looked poised to dominate the electronic cigarette market, partnering up with early leader Juul. But regulatory blowback over the popularity of its fruit-flavored vapes among teens opened the door for cheap, illicit substitutes, turning the investment into a bust.

Zyn, too, now faces tighter U.S. oversight that restricts flavors and marketing. These limits make it harder to keep customers from straying to other brands or spark a new sales surge, though the company still owns the only pouch brand with Food and Drug Administration authorization.

Philip Morris also enjoys massive production and operational scale. Still, Zyn’s stratospheric rise may draw vape-like heat. Even a strong start can still go up in smoke.

Follow Sebastian Pellejero on LinkedIn.

CONTEXT NEWS

Marlboro-maker Philip Morris International said on July 22 that it generated $10.1 billion of revenue in the second quarter, up 7.1% year-over-year but just short of analysts’ average estimate of $10.3 billion, according to LSEG data. Shipping volumes in the group’s cigarettes business declined 1.5%, while volumes in its nicotine pouch business rose 23.8%.

(Editing by Jonathan Guilford; Production by Pranav Kiran)

((For previous columns by the author, Reuters customers can click on PELLEJERO/ Sebastian.Pellejero@thomsonreuters.com))