Tilray Sees Dead Cat Bounce

About: Tilray, Inc. (TLRY)
by: Bill Maurer

Shares initially pop on Privateer's position update.

This was likely just a mini short squeeze.

Stock still needs major growth to support valuation.

In the end, I believe that all bubbles burst, and that certainly has been the case with Canadian cannabis firm Tilray (TLRY). I have been extremely bearish on the name ever since it started its mega run up last year, and those that either shorted the name or took their gains in the triple digits must feel pretty good right now. Recently, the name spiked on a surprise announcement, but this rally has already faded a bit and the stock could easily head back to its recent lows.

(Source: Yahoo! Finance)

One of the reasons I was so bearish on the name is that after going public, there was a very small amount of stock available in the market. Unfortunately, after a time, that situation was likely to change, with millions of shares being able to be sold by insiders. In this case, Privateer Holdings, which owns a majority of Tilray, was going to need to come up with a plan for its position, and we got the update this week, with the summary below:

"Pursuant to the terms of the proposed transaction, the shares of Tilray stock distributed in the merger would be subject to a lock-up allowing for the sale of such shares only under certain circumstances over a two-year period. During the first year following the closing of the merger, shares will be released only pursuant to marketed offerings and/or block trades to institutional investors or via stock sales to strategic investors, all of which would be arranged at the sole discretion of Tilray. The remaining shares will be subject to a staggered release over the course of the second year following closing. In addition, Privateer has agreed in the LOI to a lock-up on its Tilray shares during the negotiating period for the definitive merger agreement."

Once this downstream merger of Privateer and Tilray is complete, shares can start flooding the market. As the most recent 10-Q filing detailed, Tilray had 16,666,667 Class 1 shares outstanding and a little over 80.5 million Class 2 shares outstanding. Privateer's 75 million shares represented all of the Class 1 and the rest were Class 2, more than 58.3 million.

Tilray's IPO was for 10.35 million Class 2 shares, so that was the original amount available in the market for trade. According to Yahoo! Finance data seen here, the float is now up to 14.17 million. That's still not a lot considering the outstanding share total, meaning the stock can move quite fast, and we have definitely seen that. So when Tilray shares spiked earlier this week, it likely was the result of a mini short squeeze. Take a look below.

(Source: NASDAQ Tilray short interest page)

At the end of May, more than 6.4 million shares of Tilray were short, which equals more than 45% of the total float. That would mean that this was one of the most shorted names in the market today. Last year's mega rally in the cannabis sector put a lot of eyeballs on names like Tilray, especially when they were selling for extraordinary valuations.

Tilray had lost nearly 90% from its high, trading below $35 in the past week or so. Thus, when the Privateer news came out, there were some who saw this as a positive that there would be an additional lockup period, thus extending the timeline out a little for which sales of shares would start. As the chart in my opening showed, shares popped, and with a large short base, I think some of the shorts got squeezed a little, with shares hitting a high of $46.65 on June 10th. However, Tilray is down almost $6 since then, as of Thursday's close.

Even with the stock dropping from $300 to $40, you still have to question whether the name is still overvalued. As you can see in the graphic below, Tilray trades at more than 5.2 times expected 2023 yearly sales, and that depends on substantial growth from here. This also assumes no stock price change or dilution moving forward, and we know that stock-based compensation and equity used for acquisitions will likely send the share count higher in the next few years.

(Source: Seeking Alpha estimates page, seen here)

In the end, Tilray's recent pop looks like a dead cat bounce, one that likely was caused by a mini short squeeze. With short interest in the name hitting a new high at the end of May, those short likely scrambled after the Privateer release sent the stock higher. However, as tens of millions of shares are still going to be sold, there really wasn't anything positive to take away from this announcement, and the rally hasn't lasted. As a result, Tilray still needs a lot of growth in the future to support its large valuation, even after dropping nearly 90% from its peak.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.