What happened

Shares of Carvana (CVNA -0.38%) dropped as much as 16.9% this week, according to data from S&P Global Market Intelligence. The online used car marketplace got an analyst downgrade and was negatively affected by an earnings report from Ally Financial. As of the market close on Thursday, Oct. 20, the stock is down 15.5% this week.

So what

On Wednesday morning, consumer bank and automotive lender Ally Financial reported its third-quarter earnings. The company disappointed investors across the board, with earnings, revenue, and guidance coming in below expectations. What does this have to do with Carvana? Since Ally is the largest used car lender in the United States, its results can give a reading on the health of the used car market. The two companies even have a partnership in which Ally provides loans to buyers on Carvana's marketplace.

Ally's third-quarter auto originations were $12.3 billion, down $1 billion from the second quarter. This could indicate that Carvana is seeing worsening demand in its marketplace. Used car prices are also coming off their highs from the COVID-19 supply crunch. Lower car prices mean that Carvana might have to write down any of the car inventory it bought at higher prices.

On top of Ally's report, Wedbush downgraded Carvana's stock this week. Even with shares down over 90% this year, Wedbush says the business model is sputtering. Wall Street hates Carvana stock right now, and it is no surprise to see the stock fall more than 15% again this week because of it. 

Now what

With shares down in the gutter, Carvana's market cap is now just $2.87 billion. For a company that generates $14.6 billion in revenue, you might think this is a bargain and that it is time to buy the dip on Carvana's stock. But investors should be cautious with this company.

Carvana burned over $750 million in free cash flow through the first six months of this year and only has $1 billion in cash on the balance sheet. With close to $8 billion in total debt, it will be tough for management to raise funds at any reasonable interest rate. That means unless Carvana can turn around its business soon, the company will either file for bankruptcy or raise money through a stock offering. If it does a stock offering, this will cause massive dilution for existing shareholders at these prices. No matter what happens, current shareholders would likely be hurt.