At first glance, it seems that GameStop ($GME), which grew rich and famous selling video games, is likely to wither and die as its customers migrate from store-bought disc-based games to on-line play and downloads. But a funny thing seems to be happening on the way to oblivion. Unlike blockbuster before it, GameStop is embracing the future.

Good Numbers

I found $GME through one of my Smart Alpha stock models, which makes sense considering that basic company fundamentals figure prominently in my selection criteria and since $GME has some impressive data-points.

Table 1

A strong balance sheet and strong returns on assets and equity (the five-year averages are depressed by large non-recurring charges in 2013) signal the potential for strong growth in the future. And better still, the stock appears to be attractively valued.

Table 2

To top it all off, $GME is buying back shares, thus providing an additional way (beyond a good dividend) to return cash to shareholders.

Notice what I did not show: growth rates. That’s the Achilles’ heel here. While EPS growth has been O.K. (in the 9% range), sales have been flattish. The growth has been occurring as a result of margin expansion. The reason for this is no great secret: On-line and digital gaming has been on the rise, thus taking market share from sales of physical discs through brick-and-mortar stores, analogous to what drove Blockbuster out of business. Margin expansion is fine for now. But sooner or later, $GME will have to start delivering on the top line.