Image source: Games Workshop plc
Own shares in war hammer maker Games workshop (LSE: GAW) has been very lucrative in recent years. Not only does the company frequently pay dividends, but Games Workshop's share price has risen 252% over the past five years.
In other words, the shares have more than triplicate in five years.
With news of a potentially lucrative alliance with Amazon announced today (December 18), could they triple again in the next five years?
Potential growth drivers
For a stock to triple its price, investors typically have to think that its future business prospects are noticeably better than today, not just a little more optimistic.
In the case of Games Workshop, I think this is true. The Amazon merger is a good example of why.
Because Games Workshop has invested in the development of intellectual property assets such as fantasy universes and characters, it can exploit them further without needing to spend a lot of money developing them further. It could be a very profitable form of business. In the first half of its financial year, the company made around £11m of operating profits from licensing deals.
The firm has now granted exclusive rights to Amazon to develop films and television series based on the warhammer 40,000 franchise. It remains to be seen if any project actually ends up being produced. But if they do, that could bring legions of new players to the Games Workshops franchises.
Those franchises are already enormously profitable. Due to its exclusive intellectual property rights, the company is able to generate high profit margins from its customer base of loyal gamers.
Over the past five years, revenue grew 214% and earnings per share grew 221%. These are exceptional growth rates compared to what most FTSE 250 companies can achieve in a period of five years.
But I actually think Games Workshop could continue to grow at that rate, or even more. Their proven business model is a license to print money. If Amazon develops a movie or TV series, already strong customer demand could skyrocket.
Possible challenges
However, a booming business doesn't always equal a booming stock price.
Games Workshop's share price is already trading at a price-to-earnings ratio of 24. That's higher than I'm usually willing to pay for even a high-quality stock.
The ratio is probably explained by investors already factoring very high expectations into Games Workshop's share price. Therefore, good results do not necessarily mean equally strong price increases. Meanwhile, any disappointment could hurt the share price.
For example, the company has limited manufacturing capacity, so if there were an issue such as a fire that closed its main factory, sales and profits could be affected. While I think the merger with Amazon is good news, there is a risk that it will lead management to be distracted from its existing core business.
However, despite the risks, I would love to own the stock.
Will they triple in the next five years? I see it possible.
But that assessment does bother me. It's simply too high for my comfort level. So for now, I'll stay on the sidelines and not buy shares yet.
