Like many other growth-dependent technology and e-commerce stocks, Carvana (CVNA -2.68%) has seen a huge valuation pullback across 2022's trading. The automotive online retail platform's share price has fallen 98% year to date and nearly 99% from the peak of $370 per share that it reached in the summer of 2021. 

Should investors pounce on the staggering valuation pullback, or is this a case where the underlying business looks flawed to the point that a long-term investment in the stock is too risky? Read on to see why these Motley Fool contributors have differing notions about what comes next for Carvana stock. 

Bull and bear figurines in front of chart lines.

Image source: Getty Images.

The bull case for Carvana  

Parkev Tatevosian: It's difficult to make a bull case for a stock down nearly 98% in 2022, but I will take the plunge. Carvana has taken a unique approach to selling used cars that is resonating with consumers. Its revenue increased from $42 million in 2014 to $12.8 billion in 2021. Admittedly, some of that increase was due to a boom during the pandemic, as production of new cars was stunted by supply shortages. 

Still, it demonstrates phenomenal growth if you consider its revenue growth between 2014 through 2019 ($42 million to $3.9 billion). To make its performance look more impressive, its gross profit margin expanded from 1% to 15.1% from 2015 to 2021. In other words, Carvana is becoming more profitable as it expands. Investors call these economies of scale, which is an excellent characteristic of a business.

Admittedly, 2022 has been a challenging year, as wild fluctuations in used car prices have left Carvana in a precarious position. Sales are falling, profit margins are contracting, and the company's limited cash balance has raised concerns about bankruptcy. Hence the 98% stock price decline I mentioned at the beginning. However, if the company can make it through these critical moments intact, it may continue expanding sales and profit margins as it did for many years. It's a risky proposition, but there could be a big payday for investors who take a chance on Carvana stock.

The bear case for Carvana

Keith Noonan: Presented with a very favorable operating backdrop, Carvana was able to scale rapidly, but there were always questions about whether the company would be able to shift into delivering regular profits. Now pandemic-driven tailwinds have mostly evaporated, and investors have been left to digest a less rosy revenue picture and a seemingly unlikely path to long-term profitability.

Retail units sold through Carvana's platform decreased 8% year over year in the third quarter, and sales in the period fell 3% year over year to roughly $3.39 billion. Meanwhile, the business posted a net loss of approximately $508 million in the period. 

Carvana can trim investments in growth projects to improve its operating costs, but it still has the issue that bigger changes will be needed to bring the business to a state of profitability. Losing less money is certainly welcome in most cases, but simply losing money more slowly still brings you to zero in the end if you don't find a way to turn things around.

While its market cap has been pushed down to roughly $578.5 million, Carvana still carries roughly $6.6 billion in long-term debt. Carvana's long-term target for an earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of between 8% and 13.5% doesn't appear realistic. Based on recent performance, there's a very real risk that Carvana will have to declare bankruptcy at some point. The company could attempt to sell stock to raise funds, but that will further dilute existing shareholders. 

Should investors buy Carvana stock?

Carvana may be able to deliver wins as a contrarian turnaround play. The company's share price and valuation have been crushed, and it may not take much in the way of good news to send the company's stock above current pricing levels. On the other hand, Carvana's core business is facing some serious challenges, and the auto retailer is still hemorrhaging cash. Investors should move forward with the understanding that Carvana is still a relatively high-risk stock despite its already beaten-down valuation.