Image source: Games Workshop plc
Games workshop (LSE:GAW) will end in 2023 as FTSE 250 stock, but I wouldn't be surprised to see it break into the FTSE 100 next year. A market capitalization of £3.5bn puts it ahead of Hargreaves Lansdown and Santiago Square.
After a disappointing trading update, the company's share price fell sharply this week, undoing most of its gains this year. While I won't be buying the stock just yet, it's at the top of my 2024 watch list.
The importance of licenses
With a price-to-earnings (P/E) ratio of 22, the company has to grow to justify its valuation. And investors have been finding out this week what happens when expected growth falls short.
A disappointing update caused the stock to drop 13% on Thursday, December 7. Total revenue for the second half of the year is expected to increase around 9% and profits to increase 12%, but the news wasn't all good.
The biggest problem is with the company's licensing division. Revenue in this part of the business is forecast to fall by around 16% and profits are likely to decline by around 15%.
Given that licensing accounts for about 5% of revenue and 12% of profits, a decline might not seem significant. But a 92% profit margin, compared to 35% for the rest of the company, makes it a key part of the investment thesis.
The outlook for Games Workshop remains overwhelmingly positive. a deal with Amazon offers significant growth potential in the future. But I think 2024 could be a challenging year for the company.
Discretionary Spending
Games Workshop products are discretionary: many people want their products, but they don't need them in the same way that they need food or electricity. And I think 2024 could be tough for consumer discretionary spending.
One of the best indications of this is credit card debt. Total credit card debt in the UK reached £67bn in August, up from £58bn at the start of 2021.
This tells me that UK consumers are increasingly reliant on credit cards to finance their lifestyles. This cannot continue forever: sooner or later, wages will recover or spending will have to decrease.
If consumers have to cut back, it will be interesting to see how Games Workshop fares. To an outsider, model figures seem like an unnecessary expense, but I think the company's resilience might surprise some investors.
That's why I see 2024 as a crucial year for Games Workshop. It would be a tremendous show of strength for the company to maintain its profits, but the stock will look very expensive very quickly if it can't do so.
Should you buy Games Workshop shares before 2024?
I think Games Workshop is one of the best companies in the FTSE 250. And while the broader consumer discretionary sector is already pricing in a tough year ahead, this particular stock still looks a bit pricey to me.
I'll be keeping a close eye on both the share price and the underlying business throughout 2024. It will be very impressive if the company can continue to grow in the near term, but I'll be on the lookout for an opportunity to buy this. quality company at a good price if not.
