For all the hype around artificial intelligence (AI) companies, Games Workshop (LSE:GAW) shares prove that investors don’t necessarily need to find the ‘next big thing’ to secure market-beating returns.
The FTSE 250-listed firm has a simple business model — it designs and manufactures model soldiers and accessories for fantasy tabletop wargaming. Most notably, it’s the group behind the Warhammer brand and demand for its products over recent years has been booming.
Let’s take a closer look at the stock’s five-year return and how the company’s investment prospects stack up today.
Strong performance
Back in April 2019, the Games Workshop share price was trading at £40.32. Accordingly, I could have bought 25 shares for a grand total of £1,008.
Today, the picture’s changed dramatically. The shares have more than doubled in value and are now changing hands for £95.25.
Although it’s been a volatile ride, the 136% gain over that time frame means the stock’s outpaced both the FTSE 100 and FTSE 250 indexes by a clear margin.
Currently, those 25 shares would be worth a whopping £2,381.25. But that’s not all.
Games Workshop is a dividend stock. Therefore, I need to factor in passive income payouts over the period to calculate what my true total return would have been.
I’d have earned £362.50 in dividends by holding my initial position over five years. Without reinvesting the distributions, my grand total today would amount to £2,743.75.
Overvalued or more growth to come?
As the company’s stock market performance in recent years suggests, past financial results have been exceptional, thanks to a fiercely loyal fan base and a wealth of valuable intellectual property assets.
Turning to the present day, the company’s half-year results smashed new records. Gross margins improved, revenue climbed from £226.6m to £247.7m, and pre-tax profits increased from £83.6m to £95.2m.
Furthermore, the board confirmed in a recent update that trading for the quarter to February was in line with expectations.
That all sounds promising, but over the past year, the Games Workshop share price has flatlined, delivering a -0.05% return for shareholders.
Part of the explanation behind the pedestrian 12-month performance is the stock’s valuation. With a forward price-to-earnings (P/E) ratio of 21.6 and a price-to-sales (P/S) ratio of 6.4, the shares look fairly expensive.
There’s a legitimate concern that the bulk of the share price gains have already been delivered for now. Consequently, future returns may be rather less impressive, especially if coming results fail to justify the lofty price tag.
A stock to consider
That said, I’m optimistic about the outlook for the Games Workshop share price. The company’s tie-up with Amazon to produce films and and a television series based on the Warhammer 40,000 franchise has the potential to be a major catalyst for further growth.
Granted, investors may need to exercise patience. Creative guidelines still need to be agreed between the two companies. In addition, producing movies and a TV series is a lengthy process, so we’re unlikely to see anything hit the big screen any time soon.
Nonetheless, it’s encouraging to see Games Workshop leverage its valuable brands cinematically to create a potentially substantial future revenue stream. For long-term investors who are prepared to wait, I think this stock’s well worth considering.
