Carvana (CVNA 0.61%) is in the business of selling used vehicles, but since its 2017 initial public offering (IPO) it has been on a roller-coaster ride rather than a relaxing drive. Because the stock has plummeted 93% over the past year, it's easy for investors to forget it was once a market favorite trading around $360 per share in August 2021 -- a mind-boggling drop to its current $19 per share levels.

That 93% drop is largely due to cash burn and debt concerns, but does Carvana's long-term potential finally make it a buy now?

Market penetration

One graphic that emphasizes Carvana's reliable playbook for entering markets isn't talked about enough. Take a glance at this, followed by some key takeaways.

Graphic showing growth of Carvana's markets.

Image source: Carvana's Q2 2022 presentation.

What this graphic shows is market penetration by cohorts in years. More simply, it shows investors Carvana's ability to develop markets over time. The two oldest cohorts, 2013 and 2014, continue to climb higher and have not stalled out, suggesting that as more of Carvana's newly entered markets develop, there is plenty of untapped market share to be had.

Carvana's multi-story car vending machine.

Image source: Carvana.

Also note that Carvana's three youngest cohorts, 2019-2021, are hitting the ground running with higher initial market share than all the older cohorts. This tells us a few things: Carvana's brand awareness has grown, its consumer reach has increased, and its playbook of how to enter markets is working better than ever -- I suppose management learned a thing or two over the years!

These are all great signs for Carvana's future growth potential, but there is more to consider.

Show me the money!

While Carvana has shown its ability to develop and enter new markets successfully, that hardly matters if it's not doing so profitably. And while it does have much work to do in becoming profitable, this next graph shows how well it's increased its gross profit per unit (GPU).

Image showing Carvana's gross profit per unit increasing annually.

Image source: Carvana's Q4 2021 presentation.

You can see the substantial and consistent GPU improvement from 2014 to 2021. But tying this progress into the first graph, for the full year of 2021, five of Carvana's nine cohorts had a positive EBITDA margin, and its two oldest cohorts achieved greater than 4%.

Those older cohorts have reached the point that they have much lower SG&A as a percent of revenue. The truth is simple: Rapid growth is expensive, and Carvana has posted rapid growth since its IPO. But as these cohorts age, gain market share, and record lower costs, management has the ability to generate better profitability not only in GPU, but overall.

Is Carvana a buy?

A company doesn't lose 93% of its market capitalization because everything is going perfectly. Carvana is burning through cash at a rapid pace and could dilute shareholders further by raising more capital at some point. And it could be argued that Carvana simply grew too fast at the risk of its financial health, which will take rebalancing going forward.

For those risks, Carvana is not for investors who avoid financial uncertainty, and investors must understand its roller-coaster story could continue.

However, management has proven it can improve GPU and margins in over half of its cohorts, and it has plenty of incremental growth remaining even if it pumps the brakes on new market expansion. If you believe in Carvana's long-term potential, and can handle the valid and substantial risks, there's no denying this could be a great entry price if it's a long-term winner.