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£2,000 to invest? 1 high-growth FTSE 250 stock I’d buy today

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I’ve previously written about the opportunities within the video games industry with its current trajectory. This high-growth FTSE 250 company is neither a game developer nor a full-time publisher and yet has been able to tap into the rapidly expanding space without incurring any major expense.

You might not have heard of Games Workshop (LSE:GAW), but you may be familiar with its intellectual property (IP) – Warhammer – a universe filled with a rich lore of conquest and destruction!

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The core business is to manufacture and sell miniature figurines for its various table-top wargames—namely, Warhammer: Age of Sigmar, and the science fiction variant, Warhammer 40,000.

Both versions have become widely popular around the world which has led to stellar growth over the last five years, with revenue up 128.4%. More impressively, Games Workshop has streamlined its operations in an attempt to increase its efficiency. The result was an operating profit margin increasing from 14% to 33%.

The increased efficiency combined with the revenue growth has allowed earnings to increase by 429% in the same period, and thus outperform the FTSE 250 index by over 1,048%!

£m

2020

2019

2018

2017

2016

Revenue

270

257

221

158

118

Operating Margin

33%

32%

32%

24%

14%

Operating Profit

90

81

74

38

17

Games Workshop operates on a May to May financial calendar. Hence, 2020 figures are from May 2019 to May 2020 and so on.

While manufacturing and selling figurines are the core business model, there is something I think analysts have over-looked.

The FTSE 250 company has begun licensing its IP to game development studios. Developers can create digital products based in the Warhammer universe, and in exchange Games Workshop receives royalties from each unit sold.

As the business is not directly involved with the development beyond quality assurance, the income generated through these royalties is almost pure profit.

As of May 2020, royalty income represented 17.5% of company profits, up from 13.1% the previous year. I believe that these royalties will continue their exponential growth far into the future, especially since a vast line up of new titles have already been announced!

2020
Warhammer 40,000: Mechanicus – Bulwark Studios
Warhammer 40,000: Dakka Squadron – Phosphor Games

2021
Blood Bowl 3 – Cyanide Studio
Warhammer 40,000: Darktide – Fatshark
Warhammer Age of Sigmar: Storm Ground – Gasket Games

2023
Untitled Project – Frontier Developments

To Be Announced
Total War: Warhammer 3 – Creative Assembly
Untitled Project – Saber Interactive

Seeing Games Workshop take full advantage of its IP’s reputation and influence amongst gamers strikes confidence in my eyes of the management team’s ability to identify new growth opportunities. Especially so since 3D printing has become more readily available to consumers.

It is currently possible to purchase digital 3D models of the figurines from numerous online market places, and then print them at home as opposed to buying them legitimately. While it is unclear as to how much impact this threat has, the strategy of ensuring maximum quality appears to be enticing players to buy official products.

The firm’s pricing power is strongly correlated with its reputation. Therefore, as long as the quality is not compromised, I believe Games Workshop will be able to continue charging higher prices for both their figurines and royalty agreements.

The FTSE 250 stock is certainly not cheap, but given the long-term potential, it’s a company I would consider adding to my portfolio.

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Zaven Boyrazian owns shares in Frontier Developments. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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