18th-century British nobleman Baron Rothschild famously said, “The time to buy is when there’s blood in the streets.” For Delta Air Lines (NYSE:DAL) stock, there’s definitely blood in the streets.

DAL stock has fallen nearly 40% in less than a month. Fears of bankruptcy are swirling. Travel bans are going to crush 2020 revenue and profits. Delta already has announced significant moves in response, but with DAL stock down 6.7% Monday, it’s clear those moves haven’t yet calmed investors.

Contrarian-minded investors might be tempted to step into the declines. More than a few did on Friday, as Delta stock rose nearly 14%. But this doesn’t look like a buying opportunity. At least not yet.

There are real risks here, and a valuation that is not as cheap as headline multiples suggest. It can get worse before it gets better, and I’d bet it likely will.

Industry Fears Re-Emerge

The airline industry is a notoriously difficult one for investors. Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) chairman Warren Buffett infamously criticized the industry for decades after a loss-making investment in the preferred stock of USAir, which is now part of American Airlines (NASDAQ:AAL).

As Buffett detailed over the years, airlines are low-margin, commodity-priced businesses with relatively high fixed costs. That is, and has been, a recipe for disaster when times get tough. Indeed, Southwest Airlines (NYSE:LUV) is the only major U.S. carrier that has never gone bankrupt.

Delta itself went bankrupt in 2005 before exiting the process in 2007. Now, there are fears that the industry’s underlying weakness are returning to the fore.

Revenue is going to plunge this year. The airline said last Tuesday that capacity was going to drop 15%. By Friday, the outlook was much worse: an internal memo said capacity would come down 40%. Delta Chief Executive Officer Ed Bastian wrote that “the speed of the demand fall-off is unlike anything we’ve ever seen.”

Even a 40% cut almost certainly won’t be enough. United Airlines (NYSE:UAL) last week outlined a “dire scenario” in which revenue drops 70% in April and only recovers to a 20% decline by the end of the year. Just a few days later, that scenario hardly looks dire. Indeed, it may prove conservative.

Whatever the actual numbers, revenue declines are likely to outpace capacity declines. And this is the problem with the industry that Buffett long identified. When times are good, the industry posts solid, but not necessarily world-beating profits. When trouble hits, however, “dire” scenarios become reality in short order.

Profits Get Wiped Out

In 2019, Delta had an impressive year. Revenue of $47 billion was an all-time record. Adjusted earnings per share rose 30% year-over-year, to $7.31.

But 2019 numbers show the risk in 2020. In a record revenue year, amid a strong economy, Delta generated $4.2 billion in free cash flow. That’s less than 9% of revenue.

Cut revenue by 20% and even assuming costs come down, that free cash flow almost certainly gets wiped out. Lower fuel costs thanks to plunging crude prices do help: Delta last week estimated a $2 billion benefit for the full year. (Fewer flights, however, obviously mean that benefit will be lower than expected.) Parking aircraft and freezing hiring can help as well.

Still, Delta is headed for significant short-term pain and a mid-term impact. It took a couple of years after both the attacks of September 11th and the financial crisis for industry passenger volumes to return to their highs. The effect of the coronavirus are expected to be similar.

Delta isn’t likely to go bankrupt immediately. The company said last week it should close this quarter with “at least” $5 billion in liquidity (cash plus borrowing availability). It can borrow against its airplanes as well. The company has brought overall debt down in recent years, which leaves it better-positioned than some rivals (notably American) to manage a multi-year soft patch.

The problem for DAL stock is that avoiding bankruptcy isn’t necessarily enough to suggest upside for the stock.

The Case Against DAL Stock

Even after these declines, Delta still has a market capitalization over $30 billion. And there’s a case that the stock isn’t necessarily that cheap at this point.

Relative to earnings, the stock admittedly looks like a steal. It trades at less than 5x 2019 adjusted EPS.

But, again, this is a highly cyclical business. And it suddenly looks like 2019 earnings were a peak. If that’s indeed the case, DAL stock should trade at a compressed multiple relative to those profits.

Even that ignores the near-term problem: the news is going to get worse. Travel stocks are plunging across the board. There’s little sign of a bottom in this market more broadly. Many companies with better, stronger, business models and less direct exposure to the coronavirus have seen their stock prices drop ~40% as well. I’m loath to necessarily pick Delta stock out as the winner — at least right now.

The Long-Term Case

All that said, at some point normalcy will return. And taking the long view, the news for DAL stock isn’t quite as bad as this analysis has so far suggested.

Indeed, Buffett himself turned bullish on the industry in 2016; Berkshire Hathaway owns 11% of the company. And the ‘Oracle of Omaha’ said just last week that he isn’t selling any of his airline stocks.

I too saw value in the industry at the start of the year, calling the U.S. Global Jets ETF (NYSEARCA:JETS) my pick as the Best ETF of 2020. That obviously was a poor call: JETS has been halved so far this year.

But the reason for optimism toward the industry was that rational behavior had returned. Damaging fare wars were out of favor. Delta wasn’t the only company to significant reduce its debt. Millennial customers continue to prefer experiences like travel to material possessions.

The risk now is twofold. First, that a prolonged impact will lead to financial distress that in turn requires potentially high-cost help from the federal government. The industry said Monday it was seeking $50 billion in such funds.

Second, that a post-coronavirus economy will see a return to irrational behavior. As Buffett himself put in 1989, the commodity nature of the business means “it’s impossible to be a lot smarter than your dumbest competitor.” In high times, the industry was smart. Will that continue in a time of struggle or desperation?

Be Careful

I don’t believe Delta will go bankrupt. I do believe DAL stock will rally, at least at some point. But an investor can’t just look at a 5x trailing price-to-earnings multiple and a short-term impact, and assume this sell-off is unjustified or will end anytime soon.

Even if the coronavirus stops spreading and life returns to something close to normalcy in the coming months, there are going to be ripple effects for the industry. In the meantime, with a market capitalization still over $30 billion, a significant debt load, and trouble ahead, the short-term bottom isn’t necessarily in for DAL stock.

Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.