Games Workshop Stock: A Bet Against The 3D Printing Clock (GMWKF)

Published on the Value Lab 27/6/22

Games Workshop (OTCPK:GMWKF) was one of the best performing stocks in the whole UK market some years ago around the release of a new set of rules to streamline one of the main GW franchises, Warhammer Fantasy. Age of Sigmar was easier and revived a franchise that was mired in a complicated ruleset and a gatekeeping player base. The extremely high markups on GW’s plastic miniatures in combination with revived sales growth painted the picture of a company with an incredibly dedicated end-market that is willing to spend all their disposable income on the hobby, as well as the capacity for growth in the hobby. During COVID-19, despite the pre-supposed reliance on the stores to onboard players and foster community, after an initial drop, sales started to rapidly recover and grow as more people looked for hobbies during pandemic boredom. The company is a juggernaut of high ROICs and stable end-markets, or at least it was. As a consumer of the product myself, I see serious threats to the GW model, threats that are only exacerbated by the lessened goodwill for the company. This threat is 3D printing.

Warhammer Getting Real Expensive

The question of 3D printing is about economics. High upfront costs and low variable costs mean good value for players that intend to have a lot of models. Higher GW prices also increase the return to 3D printing when those higher prices come from nothing but GW’s ability to flex pricing power on a fanatical end-market. How bad have price increases gotten?

10 years ago, a tactical squad of Space Marines would cost about 32 EUR, and now they’re 42 EUR. Tactical squads are relatively cost efficient being the basis of a Space Marine army, and a 3% rough annualised pricing increase beats inflation, but isn’t particularly grotesque. A Stormraven Gunship on the other hand went from 55 EUR in 2015 to about 87 EUR today, so around 10% annual price increase on that one. In a similar span of time, a vindicator has gone from 35 to 55 EUR, again a bit over a 10% annual increase, and other army stalwarts have similarly risen in price.

3D Printing Economics

Meanwhile, the cost of 3D printing has fallen dramatically. An excellent 4k printer from Elegoo now costs around $350 and a kilo of resin to print with around $50. On a running basis, you can print an average model for about $1 including all the wasted resin cost from fails and the supports. Meanwhile, using a tactical squad as an example, which is by far one of the most economical boxsets you can buy from GW, the cost per mini is about $4.5. The savings you’d get from 3D printing 100 average-weight minis covers the cost of the printer. If you split the printer with a friend, you’d already recoup your investment after 50 minis, which constitutes a medium-size skirmish point army, but nothing spectacular. Every mini you print after the payback period is printed at an 80% discount.

Badwill

While a 10% annual price increase might sound like a really good investment case, proving superb pricing power, it’s not when a substitute to produce similar quality minis is becoming increasingly economical. The 3D printing community is growing a lot, especially with CAD software like Blender being free and pretty easy to use, allowing for pretty extraordinary ripping and customisation of GW models. Yes, it’s not legal to distribute these rips because the IP is heavily protected and GW is very litigious, but they are widely available and often free. GW may have also depended on goodwill from the community for many years. Having relationships with your local shop and being allowed to play there depending on your minis being GW sanctioned, i.e. not 3D printed, was a deterrent. Moreover, wanting to support the IP was a reason to keep giving GW your money as the supplementary content grew in the form of Black Library books and audiobooks and other content. However, GW’s spree of nixing YouTube Warhammer fan channels and the torpedoing of the Astartes project, co-opting it and its creator but immediately worsening it as they exercise their own creative license, has been received very negatively by the community. Efforts to also take down 3D printing files that were nothing more than for customising your army, not replacing a GW one, has also been received negatively.

Conclusions

While badwill is just one factor, the economics of 3D printing will of course dominate the decision for players to move to that option. Since the average 1500 pt army will cost around $500, the average player already has the incentive to switch to a 3D printer today. Moreover, newer printers are being released every year with higher resolutions, larger chambers and faster print times. Soon 8K printers will become as affordable as a 4K printer is today, so the benefits to 3D printing are only growing, especially as GW continues to hike prices.

The current multiple lies at around 10x EV/EBITDA. Retail sales are recovering now, and online sales are retreating as we get a reopening. Overall sales are still seeing growth, but it is low enough where some inflation is eroding the profitability, causing declines in operating profit. Headcount increases as well as greater logistic costs of transporting minis from Nottingham are all contributing to this reduced profits. The hobby might be even quite recession resistant due to the fanaticism of the fanbase, but we are seeing some stagnation already in results, unlikely still to be the consequence of greater share from 3D printing. Volumes are indeed still rising, with pricing increases taking a pause. First, we think this pause will not be momentary, as any further increases will only accelerate 3D printing adoption. Secondly, the adoption of 3D printing will affect both volumes and pricing together, causing quite a pernicious drop in profits from miniatures. A 10x multiple is not too excessive, pricing in tepid growth from here on out despite the currently high ROICs. Moreover, the company has a very valuable IP in Warhammer, and it is being leveraged into a streaming service, still very much in its infancy in terms of traction and quality of content. The multiple is by no means excessive in our view, but it is difficult to price the extent of the 3D printing threat to the GW business model, and that is a reason enough to not buy the stock.