The FTSE 250 has been home to a few millionaire-making stocks over the last two decades. But few investors could have predicted that Games Workshop (LSE:GAW), the creators of Warhammer, would become one of the best performers.
In July 2008, the stock collapsed to a low of 116.50p. Today, the group’s shares trade at around 9,700p – an 8,426% increase. To put this into perspective, a £15,000 investment at this low point would now be worth just over £1.26m. And that’s before factoring in over a decade’s worth of dividends!
Such success stories are few and far between. And spotting them early on is an even bigger challenge that almost all investors are trying to solve. But there were some early signs of Games Workshop being a winner. And by hunting down other businesses with these same traits, the odds of finding another 10+ baggers can be increased.
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The growth behind Games Workshop
Today, Warhammer is a massive brand with various games, countless books, and endless community-created content. The company started as a modest enterprise in 1975 but has since evolved drastically into a £3.2bn empire. However, most of this growth, actually occurred more recently.
CEO Kevin Rountree implemented a key change in strategy in 2016 that would allow third-party retailers to start selling their products online. This decision had massive implications for the firm’s existing customer ecosystem.
Until this point, hobbyists would do most of their Warhammer shopping inside an official store. But with this change in policy, suddenly Warhammer became available almost everywhere across the developed world. And since third-party retailers usually offer a 10% to 20% discount, players quickly migrated to take advantage of the savings.
Skip ahead to today. Warhammer stores largely don’t make much money. Rather, they act as an entry point into the hobby that now seems to be everywhere courtesy of its near-free franchise-like network of third-party retailers worldwide.
Once hooked, new customers will likely migrate to third-party party retailers for the bulk of their future purchases. But even though Games Workshop earns less from these sales compared to an official store, the increased volume of sales more than makes up for it.
Finding the next millionaire-making investment
Games Workshop continues to be a terrific business today with a cult-like fanbase, immense pricing power, and a globally recognised brand within the gaming space. That’s why it’s already in my portfolio. But while I’m optimistic about the future, I don’t think it’s likely to see another tenfold return any time soon.
That would require the company to grow into a £30bn enterprise, which isn’t impossible, but doesn’t seem likely unless its able to rapidly expand into new markets. I think it’s far more likely that another FTSE 250 stock will deliver these sorts of returns before Games Workshop can repeat its historical performance. The trouble is finding it.
Going back to 2008, the biggest tell-tale sign of long-term success for this business was its customer base. The brand certainly wasn’t as prominent as today. But the intense popularity of its products and the addictive nature of the hobby were already present. And after years of building up steadily, all it took was one decision from management to unleash its full potential.
