What happened

Shares of Carvana (CVNA 6.68%) were going in reverse for the second day in a row today after the company posted disappointing results and wide losses in its third-quarter earnings report. Investors continue to rush to the exits in fear that the online used car seller could go bankrupt. With used car prices falling, the company is sitting on billions of dollars' worth of depreciating inventory.

As of 12:19 p.m. ET, the stock was down 14.8% after falling 39% on Friday.

So what

In the third quarter, Carvana's revenue declined 3% to $3.39 billion, missing estimates of $3.7 billion as units sold fell 8% to 102,570.

While that result was disappointing, the real problem was that gross profit per unit, the key metric driving profitability, fell $1,172 to $3,500, leading to a much wider loss on the bottom line as its loss per share under generally accepted accounting principles (GAAP) widened from $0.38 per share to $2.67. On an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, it lost $200 million, and the company has burned through more than $1 billion in free cash flow in the first three quarters of the year.

Carvana finished the quarter with $316 million in cash and equivalents, but $4.4 billion in available liquidity through a short-term credit facility and unpledged real estate. It's likely it will have to borrow more money as the company said economic headwinds have strengthened into the fourth quarter.

Now what

With $4 billion in liquidity, bankruptcy doesn't look like an immediate threat to Carvana, but the company has never been profitable and faces the most challenging used car market in a long time. 

As long as used car prices are falling, the business model seems broken. While prices will eventually stabilize, that may not happen for several more months or at least until the Federal Reserve stops raising interest rates. Some Carvana bonds maturing by 2028 are trading at less than $0.50 on the dollar, meaning the market thinks it's more likely than not that the company will fold by then.

If the company can survive until car prices rebound, there is upside potential, but the stock is highly risky at the moment.