Carvana (CVNA -3.05%) and Marathon Digital Holdings (MARA -0.65%) are two of the market's most heavily shorted stocks, with 71% and 35% of their outstanding shares being sold short, respectively, as of Feb. 27.

Carvana's online sales of used cars slowed to a crawl as inflation curbed purchases of vehicles and rising rates discouraged customers from taking out new auto loans. Marathon Digital's Bitcoin (BTC -0.36%) mining business, which was built entirely on expanding its fleet of miners and mining more coins, struggled as the top cryptocurrency lost its value. 

A person is showered with cash.

Image source: Getty Images.

Both companies drowned in red ink as their sales growth stalled out, and their balance sheets cracked under their massive loads of debt. However, the belief that these two companies could go bankrupt has already reduced their valuations to historically low levels. With an enterprise value of $9.3 billion, Carvana trades at just 0.8 times its 2023 sales. Marathon's enterprise value of $1.4 billion gives it a comparable EV/Revenue ratio of 3.2.

Therefore, any positive news might lift both stocks and spark massive short-squeeze rallies in this volatile market. But can either of these struggling companies stabilize their businesses long enough for that to happen?

Carvana could run out of cash this year

Carvana's revenue rose 6% to $13.6 billion in 2022, but that represented a severe slowdown from its 129% growth in 2021. Its growth stalled out as the vehicle shortage during the pandemic reversed into a supply glut -- which caused used car prices to plunge as interest rates rose. Its net loss widened more than tenfold from $287 million to $2.89 billion.

Those staggering losses caused Carvana's three biggest creditors, which collectively held about 70% of its debt, to band together last December to force the company to either restructure its debt or pursue fresh financing. That news sparked concerns that Carvana would go bankrupt.

Carvana had $6.8 billion in long-term debt on its balance sheet at the end of 2022, which easily eclipsed its $434 million in cash and equivalents. Only $201 million of that debt matures within the next 12 months, but it still paid $486 million in interest payments on all of its long-term debt in 2022.

Analysts expect Carvana's revenue to decline 12% to $11.95 billion this year, but for its net loss to only narrow to $1.47 billion. Simple math suggests it could fail to pay off the current portion of its long-term debt and its upcoming interest payments this year.

However, Carvana's business could still stabilize this year if used car prices recover. Those prices in the U.S. climbed for the third consecutive month in February as inflation and the high prices of new vehicles drove more consumers toward the secondhand market. If that acceleration continues, Carvana might just have a shot at stabilizing its struggling business.

Marathon's fate is still tethered to the Bitcoin market

Marathon mines Bitcoin with its own fleet of miners and occasionally purchases more Bitcoin on the open market. Its stock soared past $80 in Nov. 2021 as Bitcoin's price rose to around $65,000, but it now trades at about $7. Marathon's stock dropped with Bitcoin's price, but it also missed its own growth targets, grappled with a Securities and Exchange Commission (SEC) probe regarding potential securities violations, and recently had to restate all of its recent financial reports.

Rising interest rates also drove investors away from unprofitable companies with slowing growth. Marathon's net loss widened from $10 million in 2020 to $36 million in 2021, then widened to $280 million in the first nine months of 2022 -- and all that red ink made it an easy target for the bears.

But Marathon won't go bankrupt anytime soon. It had a manageable debt-to-equity ratio of 1.3, it still had about $411 million in liquidity (Bitcoin holdings plus unrestricted cash) as of March 1, and it recently regained 3,132 in BTC (which had been held as collateral) from the failed Silvergate Bank upon canceling its credit facility and paying off its $50 million in debt.

Marathon had deployed about 90,000 miners as of March 1, but that was well below its original target of deploying 133,000 miners by mid-2022. Nevertheless, it's still holding more than 11,000 BTC and has consistently added more than 600 BTC every month to its own balance sheet, and Bitcoin's rising price could significantly boost its total liquidity.

As for the regulators, Marathon resolved the SEC probe last year by dissolving a problematic joint venture with an energy company in Montana, but it's still in the process of restating all of its financials from 2022 and 2021. All of those near-term uncertainties, along with Bitcoin's volatile price swings, could keep the bulls away.

The better buy: Carvana

I wouldn't buy either of these speculative stocks right now. But if I had to choose one over the other, I'd definitely pick Carvana as the better short-squeeze candidate. It faces a lot of near-term headwinds, but its business could recover quickly if the used car market stabilizes. Marathon Digital might bounce back this year if Bitcoin's price stabilizes, but it can't be considered a good comeback play until it restates its financials and provides investors with a clearer outlook for the future.