CarMax’s 17% Plunge: A Buying Opportunity or a Warning Sign?

CarMax (KMX) stock plummeted 17% in a single trading session after its fourth-quarter fiscal 2025 earnings report missed Wall Street expectations and the company suspended its long-term growth targets. The sell-off raises a critical question: Is this a buying opportunity for investors, or does it signal deeper trouble ahead?

The immediate catalyst was a $0.08 shortfall in earnings per share (EPS), which landed at $0.58—81% higher year-over-year but below the $0.66 consensus. Revenue rose 6.7% to $6.0 billion, narrowly missing estimates, while total vehicle sales fell short of expectations. But the real blow came from CarMax’s decision to withdraw its 2030 goals, including hitting 2 million annual vehicle sales and $33 billion in revenue. This move, paired with macroeconomic headwinds like tariffs and recession fears, spooked investors.

The Tariff Effect: A Double-Edged Sword

President Trump’s tariffs on imported vehicles and parts, which took effect in 2024, have created uncertainty. CarMax CEO William Nash argued that rising new-car prices could redirect buyers to used vehicles—a market where CarMax holds a 3.7% U.S. share. Goldman Sachs estimates tariffs could boost new-car prices by $2,000–$4,000, potentially fueling demand for late-model used cars, which CarMax specializes in.

Yet, tariffs also risk inflating used-car prices, potentially deterring budget-conscious buyers. Analysts remain split: While William Blair’s Sharon Zackfia maintained an “Outperform” rating, citing strong sales momentum, others worry about near-term volatility.

Operational Strengths vs. Strategic Uncertainty

CarMax isn’t without亮点. Retail used-vehicle sales rose 6.2% to 182,655 units, and gross profit per retail unit hit a record $2,322. Online sales now account for 15% of retail units, with digital revenue contributing 29% of total revenue—a sign of progress in its digital transformation.

But wholesale sales lagged, and the withdrawal of growth targets underscores management’s caution. The Smart Score of 2.6/5 highlights the dilemma: A “Value” score of 4/5 reflects its low P/E ratio (now at a one-year low) and market position, but weak “Dividend” (1/5) and “Resilience” (2/5) scores suggest vulnerability to macroeconomic shocks.

Analysts See Silver Linings, but Risks Linger

Despite the stumble, optimism persists. CFRA’s Garrett Nelson upgraded CarMax to “Strong Buy,” betting that tariffs will steer buyers toward its inventory. Yet, recession risks loom large: A U.S. downturn could depress auto sales, and trade-policy volatility remains unpredictable.

The Bottom Line: Buy, Hold, or Bail?

CarMax’s valuation offers a compelling entry point for long-term investors. With a P/E ratio now near decade lows and a 3.7% market share in a fragmented industry, the company’s scale and operational strengths position it to capitalize on tariff-driven demand—if it materializes.

However, the absence of forward guidance and the Smart Score’s warnings underscore risks. Investors must weigh the potential for a rebound against the possibility of prolonged uncertainty.

In the end, CarMax’s stock offers a classic value proposition: A beaten-down price, strong fundamentals in select areas, and a catalyst (tariffs) that could redefine its trajectory. For those with a high-risk tolerance and a multiyear horizon, this might be a buying opportunity. For others, the clouds on the horizon remain too dense to dismiss.

Final Analysis:
- Upside: Tariff-driven demand for used vehicles, strong gross margins, and a low P/E ratio.
- Downside: Macroeconomic risks, withdrawn growth targets, and lagging wholesale sales.
- Verdict: A “Hold” with a caveat—consider a small position for speculative investors, but wait for clarity on tariffs and economic conditions before going all-in.

CarMax’s story isn’t over. The question now is whether the market’s short-term pessimism will give way to the company’s long-term potential—or whether the storm clouds will keep investors grounded.