Based on recent price action with Carvana (NYSE:CVNA), a growing number of investors may be considering CVNA stock worthy of a buy as a contrarian wager.

Although some may be approaching it as a short-term short-squeeze trade, many may be diving back in on the hope that it survives the current industry downtown. If it does, it will fuel a move to substantially higher prices, or so the thinking goes.

Yet despite this resurging bullishness, as I’ve argued recently, I see it differently. Sure, bankruptcy isn’t inevitable for Carvana, but even if it avoids this fate, instead of experiencing a big payoff, investors could instead be very disappointed.

Over the past two years, CVNA has fallen by more than 96%. In the next two years, a similarly-sized decline may not happen, but at best the stock may hold steady, and at worst experience another double-digit drop.

CVNA Stock Could Avoid a Wipeout

At present, Carvana is hemorrhaging cash. Unprofitable even during the height of the 2021-2022 used car bubble, with demand for used cars cratering, losses have widened, with reported net losses of $806 million last quarter alone.

If that’s not bad enough, the company has a heavily-leveraged balance sheet, with around $8.8 billion in debt and operating lease liabilities.

As a result, since December, concerns that Carvana will end up filing for Chapter 11 bankruptcy have spiked. That’s when Carvana’s largest creditors formed a pact to negotiate as a group regarding debt restructuring. In most Chapter 11 situations, creditors assume ownership in the reorganized company. Common shareholders take a total loss on their investment.

Again though, it’s not set in stone that Carvana is forced to accept this option. Management has multiple alternative strategies it can pursue to avoid a wipeout scenario.

There is, however, a caveat. Although some of these strategies will not come at the expense of shareholders, chances are they will limit upside at best and result in additional big declines at worst.

Why Dilution May be Unavoidable

Carvana’s management is currently doing two things, in an effort to avoid both bankruptcy and heavy dilution for CVNA stock. First, the company’s C-suite is implementing aggressive cost reductions. Adapting to the changing environment in the used automotive space, these cost-cutting moves include mass layoffs and a big reduction in its inventory.

Second, as Carvana’s Chairman and CEO Ernie Garcia III has stated, the company is looking to tap into hard assets like its real estate holdings (worth around $2 billion) for further liquidity. Yet while it is laudable that Carvana is doing what it can to avoid diluting shareholders, it’s questionable that both these moves will be enough.

Even with the cost cuts, CVNA is expected to report heavy losses yet again this year. This will further dwindle its cash position. In addition, the current efforts to effectively downsize the business reduce the potential upside coming out of this downturn.

Commercial real estate, like the used auto space, is being negatively affected by spiking interest rates. Carvana may face challenges leaning on its real estate holdings to raise more cash in a non-dilutive way. While Carvana could avoid bankruptcy, high dilution may be unavoidable.

My CVNA 2025 Price Prediction

If the used car market recovers slowly, Carvana’s revenue could contract to the low end of analyst estimates ($10.95 billion) in 2024, and stay there through 2025.

Before the used car bubble, peers like AutoNation (NYSE:AN) and CarMax (NYSE:KMX) had EBITDA margins in the 6%-7% range. With this, Carvana’s EBITDA, at best, could hit $766.55 million that year.

Based on Carvana’s current enterprise value ($9.95 billion), shares today trade for 13 times the company’s potential 2025 EBITDA. This valuation, in line with peers, could be sustainable. Even with possible dilution, the stock could hold steady at around $1o per share.

However, there is big potential downside if the company’s multiple contracts. Or, if Carvana ultimately fails to attain margins in line with peers. Combined with moderate future dilution, this would likely push CVNA stock to mid-single-digit prices by 2025.

On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.