In early buying and selling right now (5 March), the Video games Workshop Group (LSE:GAW) share price was up 8%. Buyers appeared to love the corporate’s 49-word inventory market replace that mentioned buying and selling in January and February “has been ahead of expectations, with strong trading across both the core business and licensing”.

Because of this, the group confidently mentioned its revenue earlier than tax for the 12 months to 1 June (FY25) will even be higher than anticipated.

Though transient, the press release definitely had an impression. Because of this, the corporate’s market-cap elevated by £336m to over £4.5bn. Or expressed one other method, over £6m a phrase! Not for the reason that Gettysburg Tackle has such a brief assertion made as large an impression.

I’m joking, in fact. However the efficiency of the Video games Workshop share price has been outstanding lately.

A powerful progress story

Since March 2020, the corporate’s market worth has risen by near 140%. And it’s come a good distance because it listed in September 1994. It’s now a member of the FTSE 100 with annual income of £526m (FY24).

However its shares aren’t low-cost. For FY24, it reported earnings per share (EPS) of 458.8p. This implies the inventory at present trades on a historic price-to-earnings ratio of over 32. If issues go to plan, this can fall when the ultimate outcomes for FY25 are recognized, however not by very a lot.

Over the previous 5 years, its annual common progress price in EPS has been 17.7%, in comparison with a fall of 1.3% for its peer group.

The margin’s good too

The corporate’s latest earnings historical past tells me that it’s good at what it does. Due to this, it’s in a position to cost a premium price for its merchandise. And the marginal price of securing one other licensing deal is near zero. This explains why the group’s in a position to earn an enormous gross revenue margin — over 70%. And regardless of international provide chain inflation, this elevated final 12 months.

Additionally, there are some indicators this progress will proceed. Additional retailer openings are deliberate and, in 2024, it granted unique movie and tv rights to Amazon for a part of its Warhammer franchise.

However I believe the tempo of growth will begin to tail off. I additionally worry its merchandise are too area of interest. For it to proceed to develop, it’ll want to start out creating new ones. I could also be incorrect, however I don’t see a lot proof of this taking place.  

If Video games Workshop did enter the mainstream market, it could be unlikely to command such a formidable margin. And I can’t ignore the inventory’s lofty valuation. It appears on the excessive facet to me and I worry there could possibly be a pointy market correction if earnings begin to gradual.

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