What happened

Shares of Carvana (CVNA 4.86%) were spiraling last month after the struggling online used car dealer posted weaker-than-expected third-quarter earnings, announced another round of layoffs, and responded to increasing fears of a recession and falling used car prices.

Investors are increasingly fearful that Carvana could go bankrupt, especially if interest rates continue to rise and used car prices fall.

According to data from S&P Global Market Intelligence, Carvana finished November down 43%. As you can see from the chart below, the stock plunged on the earnings report and briefly recovered those losses before sliding again to close out the month.

CVNA Chart

CVNA data by YCharts

So what

Coming into the month, Carvana stock had already fallen more than 90% from its peak last year, but the third-quarter earnings report sounded the alarm bells for the stock.

The company missed estimates on top and bottom lines, posting a decline in revenue and a wide loss on the bottom line. Revenue in the quarter fell 3% to $3.386 billion, below expectations at $3.7 billion. Gross profit per unit declined sharply as the company was impacted by falling used car prices and rising interest rates. On a GAAP basis, the company reported a per-share loss of $2.67, compared to a $0.38 per-share loss in the quarter a year ago and analyst estimates at a per-share loss of $1.94.

The company finished the quarter with $316 million in cash and has nearly $7 billion in debt. Management said it has over $4 billion in liquidity, including nearly $2 billion in an untapped revolving credit facility, and through the first nine months of the year, the company had a free cash flow loss of $1 billion. 

The stock got a reprieve on Nov. 10 after a cooler-than-expected inflation report. Shares jumped 57% over a two-day span, but then gave up those gains. 

The following week the company laid off 1,500 employees, and The Wall Street Journal said it was facing a "cash crunch" due to its high debt burden and rising interest rates.

Now what 

Carvana is likely to continue to be highly sensitive to interest rates and inflation as bankruptcy is a very real risk at this point.

The company has never been profitable on a GAAP basis, and had been growing fast prior to the pandemic. However, with top-line growth stalling and bottom-line losses widening, it's clear why the stock is down sharply.