The FTSE 250 is home to some of the most promising growth opportunities in the UK. Most of these companies are on the warpath to try and penetrate the barrier into the FTSE 100. And one stock that’s been consistently defying expectations over the last five years is Games Workshop (LSE:GAW).
As a quick reminder, the firm is behind one of the biggest tabletop miniature war games in the world – Warhammer. Investing in such an enterprise may not sound like the most exciting prospect out there, but management has nurtured a cult-like following from its customers that’s unlocked exceptional pricing power.
Anyone who’s explored the hobby has no illusion of the high price tag that comes with it. And yet, even during today’s cost-of-living crisis and economic downturn, the company has just announced, yet again, record-breaking sales and profits with double-digit growth. And this might just be the tip of the iceberg.
More growth on the horizon?
Earlier this year, Games Workshop released the Leviathan box set to mark the start of the 10th Edition of Warhammer: 40,000. It sold out in the UK within two days and approximately one week worldwide. Apart from highlighting that Nerdom continues to thrive, it became an early indicator of the firm’s financial performance for the new fiscal year (ending in May).
Then, a trading update was released. As mentioned, expectations were demolished. And, unsurprisingly, the share price surged by double digits. Since then, the valuation has calmed down, dropping by around 15%. Seeing such a pullback is understandable, given the stock trades at a bit of a premium.
However, the 10th Edition is far larger than just one box set. The brand new Christmas army boxes have just been revealed, the new Codexes (rulebooks for each army) are slowly being introduced, and a whole suite of new miniatures is being drip-fed into the hobby ecosystem.
That places the company in a solid position to thrive in the upcoming holiday period. Pairing all this with upcoming releases of new highly anticipated video games such as Realms of Ruin and Space Marine 2, the group’s royalty revenue stream looks promising as well.
Every investment carries risk
I’ve already highlighted the volatility risk attached to these FTSE 250 shares. Trading at a price-to-earnings ratio (P/E) of 24 is not the most outlandish valuation. But it certainly isn’t cheap.
However, operationally speaking, Games Workshop still has its threats to contend with. Personally, I’m not concerned with another tabletop wargame stealing the spotlight. Since its inception in the early 1980s, Warhammer has almost always stayed on top.
But even with spectacular sales, not everyone is eager or able to fork over hundreds of pounds to assemble and paint an army. Combining this with increasingly cheaper at-home 3D printing technology may push fans towards printing their own unofficial miniatures.
This technology has yet to come close to the quality of the plastic injection moulding process that Games Workshop uses. But that could change in the long run. And it’s a threat that investors need to keep a close eye on.
Nevertheless, the exceptional pricing power and addictive nature of its games give the company a wide competitive moat, in my opinion. And that’s why I think the recent pullback in share price presents a solid entry point for investors.
