HomeMost PopularGames Workshop Group: Unlocking the Secrets Behind the World of Warhammer

Games Workshop Group: Unlocking the Secrets Behind the World of Warhammer

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Warhammer 40000 tank

An Introduction to the World of Warhammer

Over the past two weeks, I have delved deep into the world of Warhammer, trying to decipher the allure of this renowned brand. My research has included scouring Reddit groups, blogs, and YouTube videos to understand the magic that captivates people. Although I initially had no knowledge of Warhammer, my exploration has revealed the reasons why individuals are drawn to this world, some remaining loyal for decades.

But first, let’s take a step back and ask: What is Warhammer?

Warhammer is a tabletop battle game developed by the Games Workshop Group (OTCPK:GMWKF) that encompasses various “sagas.” For example, Warhammer 40K, Games Workshop’s flagship game, was launched in 1987 and continues to captivate millions of enthusiasts. Additionally, Warhammer Age of Sigmar (AoS) made its debut in 2015, followed by Warhammer The Horus Heresy in 2012. These games have stood the test of time, receiving periodic updates and expansions that enhance the storyline and characters.

The world of Warhammer is challenging to describe concisely. To learn more, I encourage you to explore the various subreddits and YouTube channels dedicated to the subject.

The complexity and imagination of these worlds attract individuals to the Warhammer brand for diverse reasons. Some find solace in painting miniatures, indulging their hobby without engaging in the actual gameplay (which appears to be the majority of GW product buyers based on my research). Others are fascinated by the intricate “lore” and find entertainment in the additional content created by GW. A subset comprises players, including casual gamers and competitive tournament participants (a smaller niche within the community). These are just a few categories, with numerous nuances in between.

Estimates from the “Goonhammer” blog suggest that the English-speaking world alone has approximately 2.4 million Warhammer enthusiasts. When considering the global audience, this number could range from 3.5 to 5 million, the majority being casual gamers and hobbyists. While it’s challenging to obtain precise figures due to GW’s nondisclosure of miniature sales data and the dynamic nature of customer behavior, social media coverage can provide an indication of the brand’s popularity.

This exhaustive introduction is crucial because, while Games Workshop’s business model is straightforward (selling plastic miniatures), understanding the reasons behind people’s unwavering love of this brand is vital for comprehending the company’s true value and potential.

The Games Workshop Group Business Model

Games Workshop Group’s website eloquently defines their business model:

We make the best fantasy miniatures in the world, to engage and inspire our customers, and to sell our products globally at a profit. We intend to do this forever. Our decisions are focused on long-term success, not short-term gains.

Games Workshop (GW) engages in the design, production, and distribution of miniatures and games, as well as the creation of additional content such as short stories, audio dramas, and novels related to their game worlds. They also sell painting materials and tools under the “Citadel” brand. GW is both vertically integrated and licenses its IP for the development of multimedia content, including video games and movies.

Approximately 95% of GW’s turnover comes from miniature and book sales, with the remaining 5% generated through IP licensing. The revenue breakdown indicates the profitability of their licensing business, contributing around 13% to the overall operating result despite representing only 5% of sales.

In terms of distribution methods, GW operates three warehouses: one near their UK headquarters, another in Memphis, US, and a third in Sydney, Australia. The company employs three distribution channels: retail, trade, and online. Retail comprises 526 stores in 23 countries, with 399 being single-staff stores owned by GW. Trade involves over 6500 independent retailers who sell other games alongside GW products. The online channel encompasses GW’s official website. Physical stores mainly offer “starter packs” and beginner-friendly products, while the other channels cater to experienced enthusiasts.

The licensing business revenue breakdown for 2023 is as follows: 68% from PC and console games, 6% from mobile games, and 26% from other sources.

Financial Overview of Games Workshop Group

GW has experienced significant revenue growth over the years, primarily driven by North America and Continental Europe. Operating margin improvement is a result of economies of scale and effective cost management. The return on invested capital (ROIC) is exceptional, indicating GW’s dominant position and strong capital management. The company’s cash generation is also excellent, enabling them to distribute excess cash to shareholders.

GW’s balance sheet is robust, with total cash and short-term investments of £90.2 million and total liabilities of £91.7 million. This financial stability reduces risk for shareholders. However, their valuation presents a potential risk, with the current P/E ratio potentially being too high based on analyst estimates.

Catalysts and Future Potential

The Warhammer hobby typically entails higher spending from new customers building their “army” or established enthusiasts expanding their collection. While prices can vary significantly, a complete army can cost anywhere from $1000 to $2000. Expenses generally decrease in subsequent years as individuals maintain their hobby by occasionally purchasing additional miniatures or paints. Going through various Reddit discussions provides insight into average consumer spending habits.

GW’s plans to expand into Japan by opening new stores could attract a significant number of newcomers and boost sales in the region. Furthermore, GW’s potential penetration into China, where Warhammer already possesses a small fan base primarily associated with video games, could rival sales in Europe and North America. The timing of this expansion remains uncertain.

Another growth catalyst is the anticipated Amazon Prime series based on Warhammer 40K, slated for release in 2024. The involvement of Warhammer enthusiast Henry Cavill not only generates massive publicity for GW but also leads to substantial royalty increases.

Based on these catalysts, different growth scenarios can be envisioned for GW.

Valuation of Games Workshop Group

Valuing GW has proven to be challenging due to its non-linear growth patterns. The company may experience years of stagnation followed by explosive revenue growth. Thus, it is crucial to incorporate a high margin of safety when making estimates. Analyst estimates indicate modest sales and earnings growth, suggesting that the current valuation may be high. While the long-term future of GW appears bright, predicting the next five years is complex. Entry opportunities may arise in the future, making it important to thoroughly understand this exceptional company now.

Risks and Conclusion

GW faces limited operational and competitive risks. The company’s financial stability and excellent management mitigate potential challenges. However, the current valuation poses a significant risk for investors. While GW’s long-term prospects are promising, short-term fluctuations in sales could lead to years of stagnant or negative returns. Patient investors may find future opportunities to invest in GW at more favorable prices.

In conclusion, Games Workshop Group is an extraordinary company with a unique competitive advantage and exceptional management. While uncertainties surround the predictability of GW’s future cash flows, adopting a long-term perspective reveals a bright future. My only reservation is the current share price, which fails to account for the uncertainty associated with short-term growth. Exceptional companies should not be sold solely due to slight overvaluation; instead, they should be cherished for decades.

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