In the Messed-Up Expectations real-money portfolio I run for the Fool, I've purchased GameStop (NYSE:GME) three different times, once in late 2010, once in mid-2011, and most recently in early 2012. A significant part of the thesis was the launch and growth of its customer loyalty program, PowerUp Rewards, which has helped it learn a lot about its customers, leading to better marketing and increased repeat purchases. Since then, it's been one of my better performers, with the total position up 111% (from an average basis of $23.55). 

I'm going to increase my holding in the company and bring it up to a full 5% allotment of investable funds, from its current level of 3%. This move is partly based on "add to your winners" and partly on where I see the company going from today.

It's been said that GameStop is a used-game seller and pretty much in permanent decline. However, I think that's a take that's too quick, and misses several things. Here's a quick list of why I believe such thinking is premature, and why I'm buying more.

  • Even though it has seen nine consecutive quarters of declining same-store sales, it has also increased its gross margin for nine consecutive quarters. 
  • It has gained market share in the game market, growing by 290 basis points in the software market and 380 basis points in the software market in the last quarter alone.
  • It has the PowerUp Rewards customer loyalty program that it mines for information. Because of the program, it knows, for example, where best to place inventory of the two new consoles to cut down on outages and logistics costs. 
  • Speaking of new consoles, Microsoft and Sony are finally releasing new versions of the Xbox and PlayStation. That will lead to more sales, which is good for all involved. Plus, management said that the two companies had increased GameStop's allotment of the consoles relative to the last console launch, apparently confident that it can sell enough to make that worthwhile. 
  • GameStop has grown its mobile and digital business from nothing three years ago to $1 billion in adjusted revenue this year. 
  • It has paid off its debt and reduced share count by 29% since the beginning of 2009. 
  • Finally, it initiated a dividend, currently yielding 2.2%.

That's seven points to consider. Here's a bonus one: It actually increased both the bottom and top of its estimate for full-year earnings, after coming in $0.02 per share ahead of its own estimates for the second quarter. 

While expectations of success have risen alongside the share price, I still think there is room for further success -- for the next couple of years, at least, as we move into a new console cycle. GameStop has done a lot of work fixing shop during its decline, and is now, I believe, poised on the brink of success. I'll be buying more shares for the Messed-Up Expectations portfolio as soon as possible.

Editor's note: A previous version of this article incorrectly stated that the PlayStation 4 and Xbox One would be backward-compatible. The Fool regrets the error.

Jim Mueller is an analyst for Motley Fool Stock Advisor and has no position in any stocks mentioned. The Motley Fool owns shares of GameStop and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.