I would have more than tripled my money if I had invested in Games Workshop (LSE: GAW) five years ago. The shares have risen 205% during that period. On top of that, dividends have been frequent. Over the past decade, the Games Workshop share price has soared an amazing 1,138%.
The current price-to-earnings ratio of 24 does not look like a particularly cheap valuation. But if I bought the shares today, might I see the price double again in the coming five years?
Powerful business model
Certainly, recent news from the company has underlined the long-term attractiveness of its business model. Last month, it announced that revenues in its latest quarter were 16% higher year-on-year while pre-tax profit was estimated to have jumped by 46%.
With an estimated pre-tax profit margin for the quarter of 45%, Games Workshop seems to have the magic sauce when it comes to making money.
Thanks to owning intellectual property rights for games like Warhammer, the company can charge fairly steep prices relative to its production costs.
It can also license rights. That could be highly lucrative while involving the firm itself in fairly little cash outlay. Indeed, the prospects of a Warhammer film franchise is one reason the shares have done well recently, although such a development has yet to be confirmed.
Long-term outlook
That business model could keep delivering the goods in my opinion.
Warhammer remains hugely popular and its large existing customer base may mean revenues continue to grow.
The Games Workshop share price has benefited over the past decade from a proven business model that can deliver profits even when the wider economy is struggling. I expect that to continue to be the case.
In fact, as the company squeezes its existing intellectual property rights harder, I think profits could surge in coming years. Last year’s post-tax profits of £135m was a record. If the current financial year continues as it has started, that record could be handily topped this year.
Set against that are some risks. Warhammer has driven a lot of the success, but if the game loses popularity that could hurt revenues and profits badly. That could push Games Workshop shares down.
Future share price prospects
I do think the P/E ratio looks high.
At the same time, I believe there could be a pathway to the Games Workshop share price doubling in the coming decade.
Why?
The current valuation factors in the expectations of considerable business growth. The first-quarter trading statement already showed that some of that is here already. But I think there is a lot more road ahead.
The company is seeking to exploit its intellectual property assets more widely, it has a proven business model with high profit margins, and there are a lot of markets the business could expand into.
In the past five years, revenues grew 114% and earnings per share were up 121%. If the business continues to deliver such strong results – more than doubling revenues and earnings per share in five years – I think the Games Workshop share price could follow.
For now I am still holding off buying due to the valuation being higher than I normally like. But if the business performance this year continues to power ahead, I will consider dipping my toe in the water.
