The fantasy miniatures specialist has built a great business but alienating its loyal followers could be devastating
Thursday 04 Nov 2021 Author: Martin Gamble

Could the imaginary battlefields created by fantasy games and miniatures maker Games Workshop (GAW) become real life battlefields between the gaming community and management?

The shares have dropped 20% in the last six weeks on no news apart from a trading update where management said trading was in line with expectations, while mentioning freight cost pressures and currency headwinds.

The share price weakness may just be profit taking after a stellar run in the shares which are up 338% since the March 2020 lows and up 18-fold over the last five years.

However, there could be other factors at play which point to more fundamental concerns.

In early September independent analyst Paul Oakley published a research note on the company in which he highlighted some risks that investors may have been downplaying.

As Shares has written about before Games Workshop has benefited greatly from operating leverage with higher revenues driving a disproportionate increase in profit due to the firm’s high proportion of fixed costs.

Oakley reminds investors that operating leverage can and does work both ways as happened in 2016 when a small £1.1 million reduction in revenues resulted in a £4 million fall in operating profit.

He says: ‘I’ve seen so many investors mistake operational gearing for genuine sustainable growth without considering the risks that come with it.

Another risk highlighted which might prove prescient is the company’s initiative to launch a subscription service called Warhammer +.

Oakley said he was ‘puzzled’ by the move because the success of warhammer.com is down to its inclusivity which the subscription service takes away, risking the wrath of its loyal fans.

Perhaps more worryingly, the company has been become more aggressive towards protecting its intellectual property by stopping Youtubers from using Games Workshop’s content to create animations and stories.

It might be a case of ‘biting the hand that feeds’ because there is no question that fan sites have been an important driver of growth for the Warhammer brand online.

In a recent (29 Oct) research note investment bank Jefferies referenced ‘simmering’ discontent within Games Workshop’s fan base which caused the shares to drop 8% on higher than average volume.

Jefferies noted a lot of negative community feedback and downvotes to Warhammer content and calls to boycott the business.

Apparently, a boycott threat on social platform Reddit attracted around 19,000 upvotes. 

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