CarMax has gotten torched over the last six months - since July 2025, its stock price has dropped 29.3% to $46.12 per share. This might have investors contemplating their next move.

Is now the time to buy CarMax, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think CarMax Will Underperform?

Even though the stock has become cheaper, we don't have much confidence in CarMax. Here are three reasons there are better opportunities than KMX and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.

CarMax’s demand has been shrinking over the last two years as its same-store sales have averaged 1.3% annual declines.

2. Low Gross Margin Reveals Weak Structural Profitability

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.

CarMax has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 11% gross margin over the last two years. Said differently, CarMax had to pay a chunky $89.05 to its suppliers for every $100 in revenue.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

CarMax’s $17.85 billion of debt exceeds the $204.9 million of cash on its balance sheet. Furthermore, its 16× net-debt-to-EBITDA ratio (based on its EBITDA of $1.09 billion over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. CarMax could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope CarMax can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of CarMax, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 19.3× forward P/E (or $46.12 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

Stocks We Like More Than CarMax

Check out the high-quality names we’ve flagged in our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).

Stocks that have made our list include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today.