What happened

Shares of online used car dealer Carvana (CVNA 6.24%) are careening out of control again, falling 14.3% at 11:14 a.m. ET on Monday, continuing their sharp, downward spiral that began after it reported less-than-stellar third-quarter earnings.

Carvana received a bit of a reprieve last week. The stock spiked higher on Friday after a better-than-expected inflation report suggested the Federal Reserve might ease up on its interest rate hikes, which would make financing a car (and Carvana's own debt) not as expensive as feared. 

Person sitting on ground beside car crash.

Image source: Getty Images.

So what

Although used car prices are falling, which will make them more affordable to buyers, rising interest rates will serve as a disincentive because it makes the total cost of ownership more expensive. Inventory also remains an issue as global supply chain problems continue to impact the industry. 

Carvana announced earlier this month that it had reduced its online vehicle inventory 10% sequentially, and it expects it to drop further still in the fourth quarter. That's a problem, because as even the car dealer noted in its shareholder letter, "Larger inventory positively impacts conversion, other things being equal, since with larger inventory customers have a higher likelihood of finding a car that matches their preferences." 

Now what

Carvana finds itself in a difficult position. Third-quarter sales fell 8% compared to last year, gross profits plunged 31%, and adjusted EBITDA margin turned -5.9% compared to 0.3% a year ago. It's also facing high expenses per unit sold and has just $316 million in cash on hand (plus another $161 million in restricted cash) versus more than $6.6 billion in debt.

The used car dealer may not go out of business anytime soon, but investors face the very real prospect of Carvana significantly diluting its stock to raise cash to survive.