The simultaneous institutional pile-on and short squeeze in Tilray Inc (NASDAQ:TLRY) (FRA:2HQ) stock has been nothing short of breathtaking. With prices more than tripling over the past fourteen sessions, no other cannabis stock has quantified the FOMO cannabis craze quite like Tilray. But could prices actually reach triple-digits before the inevitable capital raise comes about? We examine further.

A strange bifurcation between Tilray fundamentals, stock price and perception among investors is building up to epic proportions. The company with a $6.5 billion USD market cap on only $9.7 million dollars in quarterly revenues ($12.83 million net loss in 2Q 2018) has risen ↑456.88%, trough-to-peak, from its IPO pricing set in mid-July. An investment that perhaps could be justified in the beginning based on future growth potential has long since lost all semblance of reason.

If we conduct some basic back-of-the-napkin calculations based on present analyst assumptions, it’s quite evident the math doesn’t add up. Presently, analysts see Tilray’s full-year sales growing to US$499 million in 2021 from an estimated US$44 million this year. If we assign a generous 20% all-in net income figure (around $100 million in net income for FY 2021; the industry average operating margin for consumer discretionary companies in 2Q 2018 was 13.07% excluding interest and taxes), Tilray would trade at a basic P/E of 72.82, assuming the stock price trades at $75/share (current levels) three years out, no dividends are issued, and the share structure remains the same (it won’t).

Tilray Inc. CEO Brendan Kennedy discusses Tilray’s path toward becoming the first cannabis company to IPO on the US Exchange

In other words, not only is the stock market assigning a huge premium to Tilray’s valuation based on frothy net income assumptions which may never materialize, at the rate the stock is climbing, $75/share may be a gross miscalculation to where it might actually trade three years from now. No wonder everyone is seemingly trying to short shares and buy puts, irrespective of the FOMO mentality engulfing the marketplace.

The latest entity to question the froth in none other than Citron Research. The high-profile bearish-centric stock commentary website tweeted a note today stating they are actively shorting the stock. This despite the fact that Tilray has ran another ↑77.67% in the six sessions subsequent to Citron taking profits on their previous long position attained earlier in August. It’s quite a bold maneuver staking a short position here with the technicals continuing to look monstrously bullish.

Citron LOVED $TLRY at $26 but now we are SHORTING stock. Cowen lowered est and still raised tgt $62 only shows "RETAIL INVESTORS GONE MAD" and forgot $TLRY went public at $17 – 6 weeks ago. We would expect an equity raise at these levels. By far most expensive in space. — Citron Research (@CitronResearch) September 4, 2018

Interestingly, Citron Research appears to be banking on the fact that Tilray will issue an equity raise shortly—thus putting a damper on short term price expectations. That’s certainly a strong possibility, considering Tilray only has just over $25 million USD cash on hand, plus an available revolving credit facility of another $25 million-plus. The big losses experienced last quarter will not magically disappear next quarter once Canadian legalization begins in October.

As well, Tilray currently has no discernible Latin American (LATAM) strategy, as far as I can tell. For a company now viewed as a clear cannabis leader, one would assume the company will seek to expand to South America sooner rather than later. The ideal year round and ultra-cheap growing conditions are perfectly suited to the production of cannabanoid oils and other refined medical additives.

Whether they choose to do so organically or through acquisition, Tilray will clearly need to raise capital in order to engage. As an approximation of the price tag such an entrance might entail, Aphria recently acquired all of the issued and outstanding common shares of Scythian Biosciences Inc. LATAM holdings for $193 million, plus the assumption of $1 million in existing debt. While Tilray could possibly expand their credit facility and pursue such assets through debt issuance, why not take advantage of its soaring stock price and share structure which has room to expand?

The key question now is, have Tilray short-sellers reached max pain yet? The latest data by NASDAQ shows a short interest of only about two-percent (1,776,903 shares or just 1.15 days-to-cover). But that data is from 8/15/2018, and was accrued before the stock’s huge run beginning in the latter half of August. Also, the tradeable public float is perhaps 20% of the shares outstanding figure, making the share structure much tighter than the otherwise indicated. Tilray remains subject to insider lockout restriction stemming from the recent IPO.

Final Thoughts

As I type, the Citron Research-inspired intraday selloff has almost completely reversed, as Tilray once again trades near all-time highs. The thing is, so many investors likely find themselves on the wrong side of the trade that the squeeze could have further to play out. Outside of grossly oversold conditions, the price action has not signaled that momentum has shifted just yet.

Overall, Citron Research has a pretty good track record of sniffing out the bearish case, but it’s putting itself directly in front of the freight train by actively shorting in this cannabis FOMO environment. Irrespective of how grossly overvalued an equity is, there will be no sharp downside move until the trading algos underlying the madness sense buy-side liquidity is drying up. Thus, I wonder whether Tilray can’t top $100/share before massive sell-side capitulation—and the inevitable forthcoming equity raise—come to fruition. The tight share structure won’t do the bears any favors.

It will be a very interesting subplot to follow in the coming days as cannabis legalization rapidly approaches.