Owning shares in Warhammer maker Games Workshop (LSE: GAW) has been very lucrative in recent years. Not only is the company a frequent dividend payer, but the Games Workshop share price has increased by 252% over the past five years.
In other words, the shares have more than tripled in five years.
With news of a potentially lucrative tie up with Amazon announced today (18 December), could they triple again in the coming five years.
Potential growth drivers
For a share to triple in price, typically investors have to think its future business prospects are markedly better than its current ones, not just slightly rosier.
In the case of Games Workshop, I think this is true. The Amazon tie-up is a good illustration of why.
As Games Workshop has invested in developing intellectual property assets like fantasy universes and characters, it can further exploit them without needing to spend much money developing them further. That could be a very profitable form of business. In the first half of its financial year, the company made around £11m of operating profit from licensing deals.
The firm has now granted exclusive rights to Amazon to develop films and television series based on the Warhammer 40,000 franchise. Whether any projects ends up actually getting produced remains to be seen. But if they do, that could bring legions of new players onto Games Workshops franchises.
Those franchises are already massively profitable. Due to its exclusive intellectual property rights, the company can generate high profit margins from its customer base of loyal gamers.
Over the past five years, revenues grew 214% and earning per share by 221%. Those are exceptional growth rates compared to what most FTSE 250 firms can achieve over a five-year period.
But I actually reckon Games Workshop might keep growing at such rates – or even higher. Its proven business model is a license to print money. If Amazon develops a film or television series, that could see already strong customer demand soar.
Possible challenges
However, a booming business does not always equate to a booming share price.
The Games Workshop share price already trades on a price-to-earnings ratio of 24. That is higher than I am usually willing to pay even for a high-quality share.
The ratio is probably explained by investors already factoring in very high expectations to the Games Workshop share price. So strong results may not necessarily mean equally strong price gains. Meanwhile, any disappointment could hurt the share price.
For example, the company has limited manufacturing capacity so if there was a problem like a fire shutting down its main factory, sales and profits could take a hit. While I think the Amazon tie-up is good news, there is a risk that it leads management to get distracted from its main existing business.
Despite the risks, though, I would love to own the shares.
Will they triple in the coming five years? I see it as possible.
But that valuation does bother me. It is simply too high for my comfort level. So, for now, I will stay on the side lines and not buy the shares yet.
