In early trading today (5 March), the Games Workshop Group (LSE:GAW) share price was up 8%. Investors appeared to like the company’s 49-word stock market update that said trading in January and February “has been ahead of expectations, with strong trading across both the core business and licensing”.

As a result, the group confidently said its profit before tax for the 12 months to 1 June (FY25) will also be better than expected.

Although brief, the press release certainly had an impact. As a result, the company’s market-cap increased by £336m to over £4.5bn. Or expressed another way, over £6m a word! Not since the Gettysburg Address has such a short statement made as big an impact.

I’m joking, of course. But the performance of the Games Workshop share price has been remarkable in recent years.

An impressive growth story

Since March 2020, the company’s market value has risen by close to 140%. And it’s come a long way since it listed in September 1994. It’s now a member of the FTSE 100 with annual revenue of £526m (FY24).

But its shares aren’t cheap. For FY24, it reported earnings per share (EPS) of 458.8p. This means the stock currently trades on a historical price-to-earnings ratio of over 32. If things go to plan, this will fall when the final results for FY25 are known, but not by very much.

Over the past five years, its annual average growth rate in EPS has been 17.7%, compared to a fall of 1.3% for its peer group.

The margin’s good too

The company’s recent earnings history tells me that it’s good at what it does. Because of this, it’s able to charge a premium price for its products. And the marginal cost of securing another licensing deal is close to zero. This explains why the group’s able to earn a huge gross profit margin — over 70%. And despite global supply chain inflation, this increased last year.

Also, there are some signs this growth will continue. Further store openings are planned and, in 2024, it granted exclusive film and television rights to Amazon for part of its Warhammer franchise.

But I suspect the pace of expansion will start to tail off. I also fear its products are too niche. For it to continue to grow, it’ll need to start developing new ones. I may be wrong, but I don’t see much evidence of this happening.  

If Games Workshop did enter the mainstream market, it would be unlikely to command such an impressive margin. And I can’t ignore the stock’s lofty valuation. It seems on the high side to me and I fear there could be a sharp market correction if earnings start to slow.

For these reasons, I’m going to look elsewhere.