GameStop (GME -3.94%) has become an interesting company beyond its Reddit rally, although that seems to be the only thing people care to talk about.

The video game retailer is facing what not too long ago looked like insurmountable odds for its continued viability to be assured, but today there's a good chance it will not only survive, but thrive.

Father and son playing video games

Image source: Getty Images.

Changing how business is done

The challenges confronting GameStop are as well known as the massive short squeeze that catapulted the retailer to every day trader's must-trade list. 

The video game industry is rapidly transitioning to a model that's digital and online, and where the need for physical media no longer exists. Although some gamers prefer to have a hard copy of a game, it's inevitable the industry will one day be almost entirely online.

A retailer with over 4,800 stores whose stock in trade is the trade-in of older copies of video games for newer ones is something of an anachronism, and its days are seemingly numbered. Of course, we don't know how bad those numbers are for GameStop anymore because it stopped providing them to investors a year ago, indicating that even it realized things were going to look very ugly.

Yet let's not forget GameStop entered into an unprecedented agreement with Microsoft last year to share the revenue generated by sales made in the Xbox ecosystem in exchange for use of Microsoft's back-end cloud-based services. While we have no idea how large that revenue opportunity is, it does speak to an avenue of sustainability for GameStop in the digital future.

There are other channels of growth, too.

A chance to transition

The video game console market, both used and new, is a potent sales driver, so even though games are pushing further into digital, gamers still need consoles to access them, and GameStop is the go-to retailer for that.

Currently, demand for the latest consoles from Microsoft and Sony is outpacing supply, and early on there were extreme shortages. Now they're helping the retailer to dramatically alter how it grows sales.

In its just-reported fourth-quarter earnings, GameStop said global e-commerce sales surged 175% and represented 34% of total sales for the period ended Jan. 30, a near threefold increase from last year.

The COVID-19 pandemic is showing the retailer how its online business can carry it forward, even as a large percentage of stores were closed, particularly in Europe, as it has for a lot of retailers.

This is part of what activist investor and board director Ryan Cohen had in mind when he urged GameStop to become the "Amazon of gaming" and de-emphasize its stores. He's called for the retailer to shed all but its most profitable locations as it transitions to an online-focused business.

GameStop reimagined

Cohen and fellow activist investor and board member Kurt Wolf, the founder of Hestia Capital, who was calling for change at GameStop back in 2019, were appointed to serve on a new committee to explore the best way for the video game retailer to make the transition to a tech stock.

Cohen, through his RC Ventures, owns about 13% of GameStop's stock. He also got GameStop to hire its first chief technology officer, poaching an executive for the post, as well as another Amazon executive to head up the retailer's e-commerce fulfillment centers. And they also just named a new chief operating officer, who also came from Amazon.

And though Cohen has called for a vast shrinking of GameStop's footprint, he's not saying it needs to be an online-only store. Its physical stores can still serve as a place for gamers to try out all the new gear and games before buying them (hopefully through GameStop's online store) as well as a meeting center for gamers, particularly for the esports events GameStop was just getting involved with prior to the pandemic.

But it also needs to become less dependent upon the console upgrade cycle, which is part of GameStop's intent "on transforming into a customer-obsessed technology company that delights gamers." This fiscal year, the retailer promises to improve customer service; expand its product lineup to include things such as monitors, game tables, game TVs -- an addressable market five times larger than what it offers now -- and improve delivery speed and service through a modernized fulfillment operation.

In keeping with the focus on the industry's digital future, GameStop also says it will leverage its digital assets, such as its monthly video game magazine Game Informer as well as its PowerUp Rewards member loyalty program. It may be a physical retailer at the moment, but it intends to increase its market share in the online gaming world.

It's game on

So while billionaire-led hedge funds are still shorting GameStop stock, it's on the basis of its current valuation, which appears all out of whack to fundamentals, and not on the prospects for the business.

GameStop is also mulling over whether to dilute existing shareholders to capitalize on the continued elevation of its stock price and demand for its shares. That could create near-term weakness, which means I'd argue GameStop stock is a buy, but only after its shares finally move past this alternate reality they've been operating in.

That time is not now, but there is good reason to believe the video game retailer still has plenty of game left in it.