It's just fine. BMI is a proxy measure for overall health and risk of future health problems. Like any global proxy it is not a perfect fit for every situation, but it's a reasonably accurate quick'n dirty screen to go looking for other issues. So it's not a diagnosis in and of itself but it's a pointer to other issues. The sit/stand test would another example of this kind of measure. It's not measuring anything specific, but it's highly correlated with health outcomes. BMI has the advantage of being incredibly easy to measure, and it can be done from historical records where height and weight are available.
So there are problems with it, notably that yes muscle weighs more than fat. So yes, many bodybuilders appear as borderline obese. What this means is that there should be followup as it's a screener. A lot of people think this affects them, but if you aren't lifting 2/3/4, it probably doesn't. Those heavily muscled individuals are so far out on the bell curve they don't affect those of us in the middle 99%.
There are other problems with it, including that it doesn't scale well with height, so it gets wonky if you're taller than 6'5" or so.
Alternatives such as waist-to-hip ratio and waist circumference are better measures for individual diagnosis, but tend to not be favored in the research literature because there are not large population databases available, and historical comparisons are generally not possible.