You could almost feel sorry for Games Workshop LON:GAW CEO Kevin Rountree: approaching the end of the year, the company announced it has a partnership with Amazon NASDAQ:AMZN in the works, which will see potentially both films and TV series made using its intellectual property, particularly its science fiction universe Warhammer 40,000.
Investors responded positively and the stock is up 15% on the month, but it also caps a great year for the maker of miniatures wargames, with shares riding high, up 40% in the last six months. It is a stand out story for a retail sector where many companies are currently wondering what the impact will be of rail strikes and a cost of living crisis on Christmas shopping.Games Workshop had already reported some excellent numbers to the market back in May, with revenue up 22%, net income up 18.92%, and diluted EPS up 19%. Shares have been rallying off a low of £57.95 established at the end of September. Not only was this a post-pandemic low, but it was also the cheapest the stock has been since the dark days of the early Covid 19 lockdown. Investors who bought stock at the end of September have been rewarded amply.
However, expectations are high. Shares have slid from a peak of around £118 in the summer of 2021. They are well down from there, and investors are obviously wondering whether Games Workshop stock is still worth a punt at a x21.86 PE ratio.
- Share tip: this FTSE 350 stock is well-positioned to benefit from rate cuts
- UK Stock Market News: Cranswick, Prudential, Games Workshop
- Domino’s vs Greggs: Which looks like the best discount food retailer to buy?
Opportunity and risk in 2023
It is going to be a year of both risk and opportunity for Games Workshop next year. The company is one of the UK’s largest listed retailers, and it will be sailing into another tough year for British retail on the high street. There are, however, a number of factors that could support it, even given a tough economic background.
Firstly, the company has a massive online presence. Although its chain of stores is a big expense, until high street banks, which are closing branches seemingly every week, Games Workshop seems to maintain a solid network of bricks and mortar stores and a major mail order business as a combined part of its sales culture. This saw it through the pandemic and we expect it to do the same in the UK recession.
Secondly, Games Workshop has a very international exposure, with stores and divisions all over the world, including in the US market, which we think will recover more quickly than the UK.
Finally, and a major tailwind for the shares, Games Workshop has demonstrated the value of its IP with the Amazon partnership. This could help it to create a substantial source of new revenues.
Has Games Workshop’s considerable IP come of age?
According to Patrick O’Donnell at Goodbody’s stockbrokers, “It provides a new outlet for the Warhammer 40K IP and a potential strategic long term partnership which could extend to multiple IPs of GAW…Only relatively recently have investors come to recognise the intellectual property value of nearly four decades or lore and rule books. Explosive growth and niche appeal make a volatile combination, however. Investor demands are not easy to balance with those of a very particular band of customers and stakeholders.”
Which brings us back to Kevin Rowntree. He is closing out the year on a high, but the big question investors will have for him is whether he can take the stock back up to the heady levels of last year. Recessions aside, the balance sheet remains an area for investors to focus on. This has to be addressed, as compared to peers in the retail sector, it is underwhelming. Cash and cash equivalents still looked anaemic for the space, and shareholders should be looking for some improvement in this area from Rowntree and his team.
The Amazon deal has made some great headlines for the company, with thousands of investors buying the news, but the company will still need to deliver some good numbers next year if expectations are to be met.
