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Games Workshop’s share price is up 1,900% in five years. Should I buy the stock now?

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Games Workshop (LSE: GAW) has been one of the best performing stocks on the London Stock Exchange in recent years. Over the last two years, its share price has risen about 250%. Meanwhile, over five years, the stock is up a staggering 1,900%.

Is this a growth stock I should consider for my own investment portfolio, or have I missed the boat? Let’s take a look at the investment case.

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Games Workshop: business description

Games Workshop is a British manufacturer of miniature wargames. The group is best known for its tabletop games Warhammer Age of Sigmar, Warhammer 40,000, The Lord of the Rings Strategy Battle Game and The Hobbit Strategy Battle Game.

Games Workshop began its life in the UK over 30 years ago. However, today, it has direct sales operations in the UK, the US, Australia, China and Japan, with around 70% of sales coming from outside the UK. The company’s market capitalisation is currently around £3.2bn, meaning it’s a relatively large company (by UK standards) these days.

Impressive financials

Its financials are certainly impressive. Take the company’s revenue growth, for example. Between FY15 and FY20, revenue rose from £119m to £270m. That represents annualised growth of just under 18%. Meanwhile net profit exploded over that period, rising from £12m to £71m.

First-half results, posted in January, showed further growth. For the six months to 29 November 2020, revenue was up 26% to £186.8m while basic earnings per share increased to 226.1p from 145.9p.

The company is also extremely profitable (five-year average return on equity of 57%), very cash generative, and financially strong with a robust balance sheet. All in all, this appears to be a high-quality business.

Can Games Workshop’s share price keep rising?

I do have some concerns about Games Workshop shares, however. One is that growth is expected to moderate next financial year (ending 31 May 2022). Analysts expect revenue growth of around 30% this year. Yet for the following year, they expect top-line growth of ‘only’ 9%. This could be upgraded, of course. However, that level of growth does seem a bit underwhelming considering that the stock currently trades on a high price-to-earnings (P/E) ratio of 28 and a lofty price-to-sales ratio of nine.

Another concern is that regulatory filings show that late in February, Chairman Nick Donaldson’s wife sold 8,000 GAW shares (nearly £800,000 worth of stock). Before this sale, the Donaldsons owned 16,700 shares, so this sale reduced their holding significantly. This could indicate that Donaldson – who is likely to have an information advantage over the rest of us – sees the stock as fully valued at present.

My view on GAW shares

Overall, there’s a lot to like about Games Workshop. The company has a great growth track record and it is very profitable.

That said, I think there are other stocks that are a better fit for my portfolio right now. Given that we’re in the midst of a technology revolution, I’d rather invest in a company that’s more tech-focused.

Like this one...

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And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of Games Workshop. 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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