Flyover Stock: Games Workshop
Flyover Stock: Games Workshop
The fantasy game miniature maker is about to take its place on the big screen and could further monetize its IP
Note: I don't intend to regularly profile companies I already own, but UK-based Games Workshop is a company that quality-minded investors should know and study for its intellectual property-based moat and thoughtful management team. Most investors outside of the UK do not know it, and with just four sell-side analysts covering it, GW qualifies as a Flyover Stock. I do not plan on selling my position in Games Workshop anytime soon, but at a minimum, I will not transact in the stock for 14 days after the publication of this post.
Executive summary
A high-margin hobby retail business that stands to grow its royalty income in the coming decade with media licensing deals.
Management consistently produces insightful annual reports with a straightforward communication style.
GW’s cash flow machine is accompanied by an ironclad balance sheet and thoughtful dividend policy.
When I started researching Nintendo about five years ago, one of my conclusions was that Nintendo was only entering its nostalgia phase. This transition presented an enormous opportunity for Nintendo management to capitalize on its intellectual property (IP) in new ways and generate shareholder value.
For the first time in its history as a video game company, generations could pass down their love for Nintendo IP. This phenomenon creates a generational communication tool, similar to how love for local sports teams can connect grandparents with grandchildren. These are deep and durable sentiments.
Consider the power of the Disney IP over time. There's no rational reason for people to travel to Florida in the middle of the summer to sweat in line for hours and spend thousands of dollars for the privilege. But they go to Disney theme parks to connect with the IP they associate with happy childhood memories and want to share that with their kids and grandkids.
Buffett said this about Disney at the 1997 shareholder meeting:
"Just think of what somebody would pay if they could actually buy that share of mind of billions of people around the world. You can't do it. You can't do it with a billion-dollar advertising budget, or a $3 billion advertising budget, or by hiring 20,000 super salesmen."
Given its ability to capture mindshare, nostalgia-based IP is valuable - especially today when distraction is just a swipe away. This scarcity makes it valuable to media companies, as evidenced by Universal’s eagerness to partner with Nintendo to produce movies and theme parks.
IP needs to be appropriately cultivated and managed, however. Consider the Hanna-Barbera characters like the Jetsons and Yogi Bear, which have not remained relevant and are thus difficult to monetize.
As such, when you come across properly managed nostalgia anchored IP, you should take notice. In 2021, I started researching a UK-based company called Games Workshop, which I thought fit the mold. I made a small investment but overpaid at the time—more on that in a moment.
Though I didn't grow up playing tabletop miniature wargames (MWG), I've come to appreciate that it's a passion for many. It gained popularity in the 1970s and 1980s with the rise of fantasy and science fiction and is a much bigger industry than you might suspect.
Similar to Dungeons & Dragons, MWGs are rules-based, and outcomes are usually determined by rolling dice. Each character has attributes like strength and movement that the player can deploy based on the roll outcome. The combination of chance and skill creates the potential for a wide range of outcomes and entertainment.
In 1983, GW was the first MWG company to create proprietary models when it launched Warhammer, a medieval dark fantasy-based game filled with elves, dragons, and orcs. The game included rich character backstories and a rulebook.
In 1987, GW built off the success of Warhammer by introducing Warhammer 40,000, a science-fiction fantasy MWG set in the future.
Today, the Warhammer universe remains the core of Games Workshop’s IP.
As the video below illustrates, the hobby is multifaceted. Some hobbyists are more interested in the gameplay, while others are more interested in painting the miniatures. A community aspect also reinforces engagement with the IP and encourages participants to stay up-to-date with the latest editions.
Over the decades, Warhammer IP has spawned scores of books (in 1997, GW launched a publishing arm called Black Library), and video games have licensed it since 1991.
However, a series of hit fantasy movies and television drove engagement growth for GW and the MWG industry, as this 2021 InPractise interview with a former GW managing director illustrates.
When I was at school collecting this stuff, you were very much in the geek crowd for doing such a thing as opposed to being in the cool kid collection. It was very niche; people did not understand it and very much poo-pooed it. Similarly with people who read comics. Over the past 20 years there has been an adoption of fantastical stories, from Warhammer all the way through the whole Marvel universe, the Lord of the Rings movies, Batman and Spiderman films, and what is great is the adoption of the creativity, being able to be told. CGI meant that what we used to have to imagine, can now be put on screen. That brought all the geeky imaginative hobbies into the main stream which changed everything.
While Warhammer has historically been a secondary beneficiary of this trend, serving as an outlet for engagement with Lord of the Rings IP, it's gaining traction on its own.
In December 2022, Games Workshop and Amazon Studios announced an agreement to produce movies and television content based on Warhammer 40,000. In December 2023, it was announced that the series would be produced by Henry Cavill, a self-described Warhammer enthusiast and former Superman and The Witcher star.
When Cavill starred in The Witcher on Netflix in 2019, sales of The Witcher 3 video game (launched in 2015) jumped 550%, and book sales jumped 560%. Expansion of the IP to new audiences drove increased demand for earlier products, renewing interest from existing fans and expanding interest to new audiences.
Nintendo management recently noted on its Q&A with analysts that the Mario movie that came out last summer expanded its IP reach to new audiences and drove incremental hardware and software sales:
“From the perspective of expanding the number of people who have access to Nintendo IP, the movie has played a larger role beyond its effect on earnings. We recognize that movies are a very effective way to generate interest in Nintendo games.”
As such, the opportunity for nostalgia IP-driven growth at GW is clear. How well management capitalizes on that opportunity will drive the business and the stock over the next decade.
Let's get into the business of GW and better understand its moat, the management team behind the business, and its valuation.