Introduction
I have been a customer of Games Workshop (OTCPK:GMWKF) (GAW in the London Stock Exchange) for about 10 years now. I loved the universes that they created and the products that they sold, be it book or game.
Fast-forward to 2017-2018, I start to delve into the stock market and being a fan of Games Workshop and their products, I decided to take a look at their company, starting with how the stock's price had been behaving. The chart I looked at looked something like this.
Like certainly many others, my jaw dropped. What had happened? Why the surge?
At this point, I was only starting to study and learn about the stock market, not yet investing. Despite this, even I felt a little remorse for not being long on Games Workshop. I felt like I missed out by not buying. Did people who bought on March 1st, 2018 miss out? No, because it is still happening.
Was it just speculation? Could the fundamentals justify the tremendous hike in share price? Having more knowledge and experience than when I first looked at Games Workshop, I decided to look at it again.
What I found was that Games Workshop had leveraged its massive IP to create 3 pillars around which to develop the company to generate fantastic returns: the core business, non-core and licensed products and the community. However, as it tends to be, the whole is bigger than the sum of its parts and in this case massively so.
Company Numbers
Before we get into understanding how Games Workshop functions, let's look at the numbers it has produced over the last 10 years. As I analysed the charts, I noticed a clear difference in the numbers between before and after the 2016-2017 mark.
In 2016, the CEO of Games Workshop changed, and brought much change with him, and the difference is noticeable in the company's numbers.
(Note: unless stated otherwise, all numbers were extracted from the company's annual and half-year reports and will be presented in £ to avoid potential complications with exchange ratios.)
Revenue and Revenue Growth
Starting with revenue, the difference in numbers I stated in the beginning is immediately clear. Up until 2016, revenue was stagnant, averaging at around £125 million.
From 2016 onward, revenue has been trending upward linearly (p-value = .39%) growing £40 million, on average, each year.
In a recent publication, Games Workshop estimates that total revenue for this year to be at least £350 million. This represents, at minimum, a 29.77% increase in revenue during the pandemic.
Earnings and Net Profit Margin
The same phenomenon can be verified in the company's earnings. Stagnant before 2016; consistent and impressive growth after 2016.
And, not only are earnings increasing, but net profit margin had a boom as well, although it has not had any significant changes in the last 3 years. Before 2016, net profit margin was 10.37%. In the last 3 years. average net profit margin was 26.32%.
For the present year, profit before tax is estimated to be at least £150 million. Using the company's assumed tax rate of 19.3%, net profit margin should be around £121 million. This corresponds to a 34.57% profit margin, a huge increase from last year.
Equity and Dividends
I bundled these 2 together because I feel they best represent the change in company mentality that I believe occurred in Games Workshop.
Up until 2016, book value was stagnant. Starting from 2016, a stable, linear (p-value = 0.11%) CAGR of 25.93%.
And finally, the same split in the dividend payments.
For the year of 2021, dividend payments were £2.35 per share, which equates to a payout of 84.26%, perhaps a testament to the company's optimism for the future.
Do not let the seemingly reduced payout after 2016 dissuade you. Even though it was reduced, it is much more stable and sustainable, averaging at 77.35% from 2016 to 2020.
Ratios
Some ratios related to the company's financial health that I find important to always analyse. Ratios related to price are discussed in another section.
- Debt to Equity Ratio: 0.25
- Current Ratio: 3.13
- Interest Coverage: 245.8
All of these are far better than the benchmark values I usually bear in the mind when evaluating a company.
Looking at all these metrics, especially at the equity growth and dividend payments seems to indicate to me that Games Workshop dropped the outdated, "business as usual", "pay-out all we can except when we can't" type of company. Games Workshop seems to have understood the importance of growing the company and providing extended value to its customers.
And, as I will try to show in the next section, leveraging the massive IP it owns was just the way to do it.
The Company and Its 3 Pillars
As I mentioned in the Introduction, I believe the company's success is owed to the 3 pillars that power it and the massive synergy between them. This is by no means a formal definition, just how I understood and describe how the company operates.
Core Business
Games Workshop's core business is selling high quality miniatures (and related accessories) to be assembled, painted, and played with. This is the surface. Let's look deeper.
Getting into one of Games Workshop's games is rather costly, both as a long-term hobby and when just starting out. At a glance, going through a "start here" page, the minimum to engage in all parts of the hobby seems to go well over $100 dollars.
"But buying a gaming console or PC is much more expensive than that!" True. But the cost of continuously engaging is much less. $100 dollars is the minimum and without giving it too much thought. Plus, it is much more psychologically daunting and much more time-consuming, the latter being fine when you are already engaged, not so much when starting.
This is why Games Workshop also bets a lot on customer experience. The company understands starting out can be difficult and facilitates this, providing a first painting and playing experience.
Conversely, it also becomes tremendously engaging after the initial anxieties have vanished. Engaging and highly addictive, to the point where fans affectionately refer to the miniatures as "plastic crack" (hard to provide a source for this one).Discussions on the ethics of an addictive business model aside, this allows Games Workshop to charge higher prices.
Still, hoping that curiosity alone brings customers to a retail site is not sufficient. This is where the non-core business comes in.
Non-Core Business and Licensed Products
The products sold by Games Workshop outside of its core business are vast. These include books, video games, a monthly magazine and others.
In the first six months of the present year, royalties receivable were £8.7 million, which is about 9.46% of the company's operating profit. A fair chunk. But the importance of Games Workshop's non-core and licensed products does not lie in the profit they generate.
Their true importance, I believe, can be found in this article from 2015. A Q&A with the company's head of licensing regarding how their strategy has changed (mainly regarding video games).
Some key bits from the interview: "profit-share style deals with no guarantees"; "make great fun games quickly, and relatively cheaply"; "that games based on our IP get good coverage - that oh-so-necessary discoverability". I urge you to read the whole article so that these are not without context.
To put it simply, the licensed products aren't a revenue stream. They are publicity for the core business. This is not a novel concept, but when properly applied to the company's massive IP, looping back to the main hobby (directly or indirectly), the potential for return is (and was) tremendous.
Furthermore, this growth, logically, can only accelerate as Games Workshop reworks the IP and expands the list of mediums in which it publishes. And Games Workshop is busy in this regard with one promising future endeavor:
Warhammer+
Games Workshop has an entire batch of animated series in the works, one of which is Astartes 2, from the creator of Astartes, a fan made animation series beloved by the community.
Paired with this, Warhammer+, launching in August, is the streaming service in which these shows will air. However, Games Workshop offers much more with this service, including free miniatures and services for fans of the core games. So this is not just a streaming service.
How successful this streaming service will be is debatable and uncertain. Assuming that only Games Workshop related content will be streamed, Games Workshop is throwing its hat in the ring with all the other services rather late and with less content immediately available. Not only this, but people are getting tired of so many subscription services.
On the other hand, the inverse could happen. Due to the all the other perks the service can potentially provide and the exclusivity of the content, how the company handles the service will be key and, ultimately, only time will tell.
Community
Finally, the community is what ties it all together. It's effect on the customer base is the hardest to quantify of all 3 pillars, but it's effect is crucial.
Between the official site of the Warhammer community, featuring everything from news articles to podcasts, to the massive unofficial forums such as the ones found on Reddit, the community is vast and interactive. What is best for business about this is the psychological effect that it produces.
An active member of the community fulfills a 3rd level need on Maslow's hierarchy of needs. In fact, look closely and you'll see that all top 3 hierarchies are fulfilled to some degree: a sense of belonging in the community, a feeling of accomplishment and a creative activity; these last 2 powered by the first.
A business that fulfills the top needs of the hierarchy is a business full of potential.
Is Games Workshop a Buy Right Now?
In short, I think so. But let's explore it a bit more.
As of writing this, GMWKF peaked around $170 going back down to $155. With this, the company is trading at a P/E ratio of around 41 and a Price/Book ratio of around 22. At a glance, this indicates that the company is tremendously overpriced.
Usually, I prefer companies trading at around 15 and 1.5, respectively. For this, GMWKF should be trading at around $62 to condone with the first ratio and around $12 to condone with the second. That's a large premium.
However, as we saw in the analysis of the company's numbers, Games Workshop is in great financial health and performing better than ever. Understanding the company's business model is also key, because it helps to comprehend the company's potential for growth, which is why I dedicated a good portion of this article on developing upon the subject.
This is the focal point of my investment thesis. Paying a premium for a premium company.
Where to buy
This small subsection compares buying Games Workshop OTC in the U.S. or buying stock in the London Stock Exchange.TL;DR - Buy in the London Stock Exchange if you can, but buying OTC is still a good option.
Buying in the London Stock Exchange has some advantages over buying on the U.S. listing:
- In the U.S. listing, Games Workshop trades over-the-counter, which implies a higher liquidity risk and trading fees.
- There is a price inefficiency to be exploited; in the U.S. listing P/E is around 41 while in the UK listing P/E is around 38, as of writing.
Either way, I consider the stock a buy in either listing.
Conclusion
Games Workshop is undoubtedly overpriced by traditional standards.
However, the company's outstanding financial position, potential for growth and ability to capitalize on it indicates that the premium paid in the short term will be compensated over the long term.
I like the products. I like the business model. I like the stock.
Antonio Fernando Lacerda Queiroz Almeida
Born in 1997, master's degree in Industrial Engineering and Management and a passion for investment.After some studying of investment concepts and strategies, I decided to start investing so that I can also learn from my own mistakes.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I am long in the London listing of the company.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
