Once known for its rapid growth and eye-catching car vending machines, Carvana (CVNA 4.86%) was previously a Wall Street darling. The stock returned over 2,300% from its IPO to an all-time high of $370 in August 2021. Now worth just $7.70 per share, it is down 98% from its peak. Let's explore three reasons why the downside looks far from over. 

Losses look unsustainable 

Like many stay-at-home-focused companies, Carvana performed well during the worst of the COVID-19 pandemic. The company enjoyed a surge of activity on its online car dealership platform -- sending revenue up 65% and 129% in 2020 and 2021, respectively. But the party is over. 

Futuristic car speeding through light.

Image source: Getty Images.

Carvana's third-quarter revenue fell 3% year over year to $3.4 billion amid an 8% drop in cars sold (to 102,570). For a mature company, a slight decline in quarterly sales wouldn't necessarily be a big deal. But, for a "growth" company like Carvana, the slowdown could spell disaster because its business model hasn't achieved the scale it needs for consistent profitability. The company's net loss spiraled from $68 million to $508 million in the period, a jump of almost 650%.

With just $316 million in cash compared to $6.6 billion in long-term debt, there is no easy way out of this situation. 

Management could kick the can down the road by raising additional debt to refinance its existing loans. But this move could increase bankruptcy risk and further crush profit margins through interest expense (which already totals $153 million per quarter). The company may also turn to equity dilution, which involves selling more of its own stock. But this can hurt shareholders by reducing their voting rights in the company and their claim on future earnings and cash flow. 

Macroeconomic conditions are worsening

Right now Carvana's biggest problem is the worsening macroeconomic environment, which includes high inflation and rising interest rates. On the operational side, this is leading to a sharp decline in used car prices, which are down 15% from their January peak. Higher rates make financing a car more expensive while inflation erodes consumer purchasing power.

The rising rate environment also increases the interest expense on Carvana's current debt while making it more expensive for the company to take on new loans in the future. 

The good news is that these headwinds shouldn't be expected to last forever. If everything goes as planned, the Fed will eventually bring inflation under control and regain the flexibility to lower interest rates as needed. That said, it is unclear if Carvana can last that long. Analysts at Morgan Stanley give it a price target of $0.10 per share in the worst-case scenario, and 40% of its shares outstanding are currently being shorted, highlighting significant market pessimism about the company's future. 

Cheap for a reason 

With a price-to-sales (P/S) ratio of just 0.05, Carvana stock is incredibly cheap compared to the S&P 500 average of 2.4. That means investors who believe the company can stave off bankruptcy long enough for macroeconomic conditions to improve could make a healthy return by betting on the company. That said, buying Carvana is risky. With spiraling debt and losses, the stock has a real possibility of going to zero.