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Since the start of 2023, shares of Carvana (NYSE: CVNA) have skyrocketed nearly 1,400% (as of April 16). During that same time, the Nasdaq Composite index is up 52%.

It would probably take you some time to find a better-performing stock in recent times. Even Nvidia, the best "Magnificent Seven" stock since the start of last year, has climbed only 500%.

This puts Carvana in a league of its own. But before you rush to buy this unstoppable stock, here are three risks you need to know about.

Risky financial situation

One key reason why the market has fallen in love again with Carvana is that the business has shown progress toward cleaning up its financials. There were very real worries that the company was about to tip into bankruptcy, particularly after it spent $2.2 billion to acquire ADESA in May 2022. Management struck a deal with creditors to extend the maturities of its debt, lowering interest payments in the process.

Carvana's total long-term debt balance of $5.6 billion (as of Dec. 31) was down from $6.8 billion just 12 months ago. That little bit of improvement likely resulted in renewed investor optimism.

However, this company is still extremely risky from a financial perspective. Carvana's debt burden amounts to 39% of its market cap and more than half of its 2023 revenue. Perhaps even more alarming, 41% of the company's fourth-quarter gross profit went toward making interest payments. In a world where interest rates might be higher for longer, this creates a reason to worry.

I'll also point to Carvana's lack of consistent profitability. With management investing aggressively behind national expansion and marketing, the bottom line hasn't been a priority. That adds more risk.

Sensitive to macro factors

Another important risk that investors can't ignore is that Carvana's business model relies on favorable macroeconomic conditions to prosper. When interest rates are low, cars are more affordable because monthly payments for consumers are lower. This is the environment Carvana rode for most of its existence.

Carvana sold 24% fewer cars in 2023 than it did in 2022. Growth could be difficult to achieve if rates remain elevated, at least at a higher level than they've been for most of the past decade.

Industry-specific factors, like used car prices and supply trends, also profoundly impact this company, and these are outside Carvana's control.

Just because a business is overly exposed to macro and industry conditions doesn't always mean it's a risky situation. But based on Carvana's unfavorable financial condition, which I mentioned in the previous section, it's in a tough spot.

Competitive forces

In 2023, there were 35.9 million used car transactions in the U.S. Based on the number of units Carvana sold last year, it currently has less than 1% market share. This business is tiny in the grand scheme of things.

There is clearly a massive opportunity present to push more used car sales online. It's a better experience for the customer. And for dealers, not having to operate brick-and-mortar locations can cut costs.

Consequently, Carvana will continue to face stiff competition as it tries to gain market share. Carmax, AutoNation, and CarGurus are scaled rivals. There are also the unlimited number of dealerships scattered across the U.S. that are building out their own e-commerce presence. This will make things difficult for Carvana to achieve consistent growth and profitability.

Carvana shares have been on a fantastic run. But I still think the business is extremely risky. While I'm still not a buyer of the stock, I can understand why some daring investors would consider adding the company to their portfolios as it sits way below its peak price.

Should you invest $1,000 in Carvana right now?

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CarGurus, CarMax, and Nvidia. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.