Vehicle e-commerce platform Carvana (CVNA 4.86%) has been a lemon for shareholders since the stock peaked at $370 per share in 2021, only to plunge to the low single digits over the past two years.

Financial problems have plagued the business, but shares spiked 30% recently after first-quarter earnings showed progress in the company's cost-cutting efforts. The stock is still down more than 97% from its highs, so is this an opportunity to sell on a bump or the beginning of a comeback?

After looking at the numbers, here is my view on whether investors should buy, sell, or hold Carvana stock.

Is Carvana's improvement real?

Carvana is an automotive e-commerce company that buys and resells used vehicles online. The company expanded very quickly in a low-interest-rate environment but got turned on its head as rates rose and rapidly appreciating used vehicle prices slowed. Carvana's management has scrambled to cut costs and slow its cash losses, and Q1 did reveal some momentum in that area.

Using non-GAAP EBITDA as a benchmark, the company reduced losses from $348 million in Q1 of last year to $24 million in Q1 2023. Additionally, management expects this number to turn positive next quarter. That's a commendable effort and a sizable pivot. However, there are still significant problems when you dive deeper into the financials.

For example, Carvana didn't earn enough gross profit to cover its selling, general, and administrative (SG&A) costs for the quarter, despite reducing those by 35% year over year and achieving a 60% increase in gross profit per unit -- $4,796. You can only cut so much meat off the bone, and Carvana may have trouble maintaining high vehicle selling prices in a recession. The path to the company making money on selling vehicles still isn't clear.

The business could run out of gas

Carvana's biggest problem is that its short-term maneuvering doesn't help solve its long-term problems. Its business requires a cycle of buying and reselling inventory, but the company's inventory is steadily winding down as it shrinks its purchases to preserve cash. Revenue declined by 25% year over year in Q1, and inventory now stands at $1.5 billion, down $400 million from three months ago.

Meanwhile, Carvana's debt hasn't gone away, and interest expenses have grown to $159 million in Q1 from $64 million a year ago as rates rise. How will the company restart growth, which it needs to become sustainably profitable? You can't buy inventory without cash; borrowing only tightens Carvana's financial noose.

The company could be forced to issue new shares to raise money, and that's a potential disaster for shareholders given the stock's beaten-down share price. Raising any meaningful cash will dramatically increase outstanding shares and shrink shareholders' existing stake in the company. 

What should investors do?

Carvana is heavily shorted -- nearly half of the outstanding shares are sold short. That could make the stock price volatile, so don't mistake a big jump in the stock for a surefire sign the company's heading in the right direction.

In reality, Carvana's problems are nowhere near solved, and the chances of investors making money remain minimal in the long run. Shareholders have negative equity right now, which means that shareholders would likely get nothing if Carvana went bankrupt.

It's probably best to avoid the stock or sell when the opportunity arises on a bounce. Carvana has painted itself into a tight corner, and there isn't yet a clear path out of it.