Lead analyst: Frank Wang.

Source: ii.co.uk.

Investment Thesis

UK-based Games Workshop (OTCPK:GMWKF) is a compelling case in the business world as the company created a niche market for itself, successfully protected it, and grew it for the past few decades. This lesser-known name from the UK has caught the attention of us, who have been trying to dig out high-quality hidden gems across the globe.


Games Workshop Group designs, produces, and sells miniature figures and games under several brands, including Warhammer: Age of Sigmar, Warhammer 40,000, and Horus Heresy. It also publishes various titles and grants IP licenses to third parties for royalty fees.

The Group has manufacturing activities in the UK and sells mainly in the UK, Europe, North America, Australia, and Asia. 75% of the company’s sales come from outside the UK. The distribution channels include the company’s own retail (517 stores in 23 countries as of June 2019), third parties, and online. See below the sales breakdown for FY2019.

Source: Games Workshop Group Annual Report 2018-2019

Although US-based investors can access its share through the OTC market, trading directly its primarily-listed ticker GAW.L is highly recommended.

Economic Moat

We believe the rich IPs, long-history reputation, and a niche focus help the company build its economic moat.

Unique IP

Games Workshop owns several strong, globally recognized brands, including Warhammer 40,000, which has been evaluated as the most popular miniature wargame in the world based on interviews with retailers, distributors, and manufacturers, according to ICv2. You can check out some reviews below on “Warhammer 40,000: Dark Imperium Boxed Set” on Amazon to gauge the level of appreciation among gamers.

Source: Amazon.

Source: Amazon.

Source: Amazon.

By fully possessing all the IPs, Games Workshop can control how people experience the hobby. The company has kept updating rulebooks and publishing comics, novels and other fiction in the Warhammer and Warhammer 40,000 universes. By far, it has eight editions of rulebooks and dozens of books released.

At the same time, the company has licensed out IPs to third parties to broaden the presence and brand exposure. There are a couple of video games with great success through the IP of Warhammer. Examples include “Total War: Warhammer I,” which has sold over half a million copies in its first few days, and “Warhammer 40,000: Dawn of War” with over 3,700 positive reviews (vs. 220 negative reviews) on Steam (see some reviews below).

Source: steampowered.com.

Strong brand

Founded in 1975, Games Workshop is one of the oldest companies in the miniature game industry. Having more than 30 years of focused experience, the company has built a strong reputation for its product quality. Right now, the company employs 228 people in the design studio, which creates all the IPs and the miniatures, artwork, games, and publications that they sell. Between 2018 and 2019, they invested £10.5 million in the studio, with a further £3.3 million spent on tooling for new plastic miniatures. The total amount invested are approximately 5.37% of the sales last year.

With the strong IPs and reputation, Games Workshop gains a durable pricing power. It is not cheap to play Warhammer 40,000. You would need to have at least a rulebook, a set of armies, and several accessories, which eventually cost hundreds of dollars. And the company has been able to keep increasing the prices of its products annually.

With a durable pricing power, the company maintains a superior gross margin consistently (see below).

Source: Morningstar

Niche market with a unique experience

Unlike players in the fantasy miniatures or table game industry, Games Workshop offers toys that are not pre-made. The company intends to serve the hobby of collecting, assembling, painting, and to let customers personalize their own experience. Some of the miniatures, such as the imperial knight, have hundreds of parts and can take hours to glue together. After players have collected a bunch of figures, they can play in one of Games Workshop’s tabletop battlefield games.

The miniature wargames do not have a fixed playing field so that players are expected to construct their custom-made playing field using modular terrain models. Through the customization of gaming experience, Games Workshop can differentiate itself from its competitors. Besides, the players have to follow a set of rules to play the games. As they learn to play the game and become more involved in the community, they develop their loyalty.

By focusing on the niche market, Games Workshop saves operating costs. As the company states, they do not spend money on advertising that speaks to the mass market. The company has kept converting their stores to one-person stores – small sites, each one staffed by one store manager. As of May 2014, about 70% of all the retail stores are one-person stores, compared to 80% in 2019. As the table above showed, the operating margin of the company has increased significantly since 2016.

Growth Opportunities

With a substantial economic moat, it appears to us that Games Workshop is well-positioned to harvest further profitable growth in the foreseeable future. The primary drivers here include geographic expansion, product pipeline, and licensing.

Geographic expansion

One of the company’s growth strategies is to find more customers who carry a similar Hobby gene around the world. It is hard to estimate the size of the Games Workshop’s potential customers. But based on market research, the global board game market is expected to reach values of over $12 billion by 2023, growing at a CAGR of more than 9% between 2017 and 2023. Tabletop and war games will keep dominating this market.

The company believes that there are great opportunities for growth, particularly in North America, Germany, and Asia. During the past six years, the number of retail stores increased by 25%, from 414 to 517. The majority of the new stores are built in North America and Asia (see below).

Source: Games Workshop Group Annual Report 2018-2019

Meanwhile, Games Workshop drives the overall sales by cooperating with more independent retailers. In 2014, the company had 3,700 independent retailers in 52 countries and operated in 16 languages covering all time zones, contributing 37% of sales, compared with, in 2018/2019, 4,700 independent retailers in 69 countries, serving customers in 22 languages and devoting 47% of total revenue.

New products and licensing

Over the last 30 years, Games Workshop has invested a considerable amount of time and capital in building abundant stories and characters in the universes of Warhammer. For recent years, there are new products almost every week, which keeps customers engaged and excited. The company has kept trying to exploit IPs in different ways. Through more partnerships with third parties – especially video game companies – the company earns royalty fees. Right now, there are about 100 video games under license from Games Workshop. In 2018/2019, royalty income increased by £1.7 million to £11.4 million, mainly due to the strong performances of “Total War: Warhammer II” and “Warhammer: Vermintide 2.” Based on the annual report, 87% of royalty fee comes from PC and console games, and 7% comes from mobile games.

Moreover, over the last few years, the company has been exploring the animation and TV domain. For example, in July 2019, Games Workshop signed a development agreement with a scriptwriter, showrunner, and production company to bring one of their famous stories and characters in Warhammer 40,000 to TV.


Apart from those quality business economics, the valuation of share does not look too encouraging to us. The stock price started to surge significantly in early 2017. As a result, the prevailing price multiples, such as P/E, P/S, P/CF, are all above their 5-year averages by a wide margin at the moment (see below).

Source: Morningstar; data as of 10/16/2019.

The free cash flow yield is currently around 3.3%. This may be justified in light of a mid-teens to high-teens CAGR but leaves no room of error for the management, and hence, few margins of safety for investors. As you may notice below, the P/FCF is near its 5-year high. We would recommend looking for a better entry point with a 4% FCF yield or better.

Source: GuruFocus; data as of 10/16/2019.


Overall, we think that Games Workshop is a good business thanks to its economic moat and growth opportunities in a self-created niche-market. The valuation of the share is making us a bit “uncomfortable” at the moment. Therefore, we would bury this stock on our watch list and wait patiently for pullbacks.

We do like the company’s management team, which focuses on the long term and return on investment. In our view, this name can be a right candidate for quality stocks that can grow shareholder wealth tremendously as long as the price is right.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mentioning of any stock in the article does not constitute investment recommendations. Investors should always conduct careful analysis themselves and/or consult with their investment advisors before acting in the stock market.

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