Warhammer is weird. That’s why it works

It’s been a big month for Games Workshop. The company will shortly ascend to London’s flagship FTSE 100 index, and has reached an agreement with Amazon to produce films and TV shows involving Warhammer 40,000 — its flagship franchise — and Hollywood star Henry Cavill.

For several reasons, GW is catnip to journalists. A lot of us are nerds, Warhammer is for nerds, and nerdy stuff is often “colourful”, in that it lets you write about fun things like orcs and sorcerers, rather than unfun things like adjusted ebitda, Mifid II or gamma.

For one reason in particular, it is also catnip to many investors: Games Workshop has made them absolutely boatloads of money.

Games Workshop is now a £4.6bn company, making it more valuable than easyJet, British Land, Burberry, Tate & Lyle, Greggs, ITV or Manchester United. In market cap terms it’s about twice the size of Rathbones, the 282-year-old investment company, and more than three times the size of Aston Martin.

As Keith Ashworth-Lord, chief investment officer at Sanford DeLand Asset Management, says: “It’s one of Britain’s great success stories.” And let’s face it, it kinda needs one.

Games Workshop managed this by being weird. Really weird. The big question now is this — can it stay that way?

Table stakes

Most potted histories of GW go something like this:

— the company was founded in the 1970s and made general stuff for nerds
— over time, it started making specific stuff for nerds, including its own core IP umbrella: Warhammer
— over more time, it has got increasingly better at making stuff for nerds, to the point that it’s one of the UK’s biggest companies.

In the midst of all that, there were purges, bad times, End Times and a lucrative foray into Middle Earth. If you want that — and the associated vibes — MainFT has you covered. But this is Alphaville, so let’s geek out.

Before we get into the weeds, however, it’s worth summing up what GW does, because it’s easy to get confused.

GW’s primary business, by a long way, is making and selling plastic and resin models, selling paints and tools with which to make those models, and providing rules with which you can play games with those models.

It will sell these things to you online. It will also sell them to you via one of its more-than-500 shops. Least favourably to the company, it will sell them through around 6,000 third-party trade accounts.

Most of these games fall within a wide umbrella called “Warhammer”, with the only exception being Middle-Earth Strategy Battle Game, set in JRR Tolkien’s Lord of the Rings universe. Here’s a rough schematic of the active games (there are many more that are “dead”, in the sense that Games Workshop no longer produces rules or models for them — though this doesn’t mean nobody is playing them):

Among the uninitiated, a mention of Warhammer tends to provoke one of two responses (after disdain):

— confusion with Warcraft, the Blizzard franchise of orcs, elves and the like, which shares some Tolkienesque qualities with Games Workshop’s fantasy universes;
— confusion with Dungeons & Dragons, a games system operated by Wizards of the Coast that is also played on tabletops, also involves orcs, elves and the like, but which is fundamentally very different.

But fantasy is a fundamentally flawed way to think about Warhammer as an IP. Sure, it’s there, but, Warhammer is a modally sci-fi game. Warhammer 40,000 (aka “40k”) is easily GW’s biggest game, its most valuable IP, and the most important thing to *get* if one is to understand the opportunities and challenges ahead.

To put it another way, this isn’t primarily about a little plastic Frodo Baggins and his wholesome hobbit friends. Instead, it’s most often about someone like this guy, a Space Marine:

An idea of how these Space Marines, GW’s biggest-selling faction, might be depicted can be seen in these trailer for a Warhammer 40k episode of “Secret Level”, an Amazon-backed series (NSFW, contains gore/violence):

We’re not in the Shire any more.

There are also more practical differences. Warcraft is primarily a video game series. Dungeons & Dragons is primarily a group role-play game.

Warhammer, to use the umbrella term, isn’t primarily like either of these. All GW’s games involve players controlling multiple models on a board, almost always to fight one other.

This can range from grand armies representing esoteric factions (see 40k, Age of Sigmar) . . .

. . . to similarly grand armies of Space Marines typically fighting other, eviler grand armies of Space Marines (see the Horus Heresy); to low-model-count skirmish games (see Warcry, Warhammer Underworlds, Kill Team and Necromunda); to, uh, sports (see Blood Bowl).

But we’re overemphasising the games themselves. Many people in “the hobby” don’t even play: Warhammer is also about making models, painting them and collecting them. It contains multitudes.

When a curious person walks into a shop that sells Warhammer for the first time, they’re not just being sold a box of plastic models and a rulebook. They’re being sold a hobby and game system: GW wants to sell them glue, paint, more rulebooks, more models, more glue, more paint, onwards and onwards.

Ashworth-Lord (not any relation as far as we can tell), doesn’t play the hobby himself, but has made GW a cornerstone of his UK “Buffetology” fund because of the strength of the fandom:

. . . The people who do play the hobby, they’re absolute fanatics. I’ve always seen that they would spend their last dime on the hobby, and that is a classic example of a business that has captured its customers’ minds.

There’s also books. GW owns Black Library, which publishes novels set in its various fictional universes — which drag people deeper into the “lore” (background and storylines) of universes, and theoretically encourage them to part with even more of their money.

There’s also a lot of video games. GW is often described as being fiercely protective of its IP but, as we’ve written before, this has not stopped it lending the Warhammer pomp to a plethora of titles over the years: some good, some excellent, some pretty regrettable.

This has created a steady but not-yet expansive revenue stream for the company, one that most analysts presume represents a virtuous circle.

There’s also an increased amount of other licensing occurring. Bandai makes Space Marine action figures. There are Magic: The Gathering / Warhammer crossover card sets. You can buy a plush 6-inch “sassy Nurgling”, should you feel so inclined.

It’s worth saying: all of this is fundamentally strange. There is no other large listed company in the UK, and arguably in the world, that compares. How does one approach such a company as an investor? Well, as ever, they start by following the money.

A numbers game

In a turgid market filled with debt-laden multinational roll-ups, Games Workshop’s finances are, basically, beautiful.

The Nottingham-headquartered company’s revenues have soared over the past decade, while it remains functionally debt-free, with most of its long-term liabilities relating to bonus holiday accumulated by its longest-serving staff.

In 2022-2023, the group reported a core gross margin of 66.5 per cent — down on the previous year, but still pretty mighty.

Sales began to soar from around 2015 as the company appointed a new chief executive and ended a period of cost-cutting. The uptick also coincided with a pivotal decision to kibosh bloated stalwart Warhammer: Fantasy and replace it with the less sprawling — and more trademark-friendly — Age of Sigmar.

Peel Hunt, one of Games Workshop’s brokers, reckoned as of last year that miniatures make up about three-quarters of the group’s core revenues:

They estimated (at the same time, so these figures will be slightly out of date) that GW’s sales are roughly split half-and-half between in-store and online, but that the biggest category are sales via trade — likely representing a fairly similar split:

Design, development and production of these miniatures take place at GW’s headquarters in Nottingham, the heart of the “lead belt” in England’s East Midlands. A team of roughly 300 artists, developers, writers and modellers collaborate to create everything from an Orc Shaman (£9 at pixel time) to a Feculent Gnarlmaw (£31.50 @pt), to a Tau Manta (C$2,321 @pt on the Canadian storefront, but seemingly missing on the GB store).

The plastic and resin used to make these models come from elsewhere, and some of its books are produced in China (a situation that proved problematic as supply chains buckled in the wake of the pandemic) but, mostly, it’s a homegrown hobby.

The UK remains a cornerstone, with the highest per capita spend by some distance, but North American growth has been strong, and optimistic GW-watchers reckon there’s much more market to reach there:

Now, as we all know: sales are vanity, profit is sanity, cash is reality.

But GW’s level of vertical integration means it’s a strong performer on those fronts as well. And margins are even larger on IP, reaching around 90 per cent:

An example of the flexibility this has given the company can be seen in recent years. In response to an increase in demand in the wake of the pandemic, the company has ramped up its production capacity by buying new injection-moulding machines. This expansion could be paid for with cash, rather than by raising debt. Noice.

Know your nerds

Obviously, the financials are only half the battle. At some point, investors need to get their heads, loosely, around what exactly a Space Marine is. Or an Aeldari. Or a Sylvaneth. Or a *checks webstore* Bloab Rotspawned. Or one of the many other distinctly trademark-able names GW has coined. Or what any of this means.

One issue is a relative dearth of information. Only a handful of analysts cover GW — Jefferies, Peel Hunt, Panmure Liberum and Goodbody (all buys) — with the number likely to thin following the exit of Panmure’s Alex Chatterton. (Edison also covers GW as a corporate client.) Unless several other research outfits initiate in the next couple of weeks, GW will enter the FTSE 100 as one of the blue-chip index’s least-analysed stocks.

This dynamic can force investors into a more hands-on approach. When Richard Bullas was considering making an investment in GW, he and his team at Martin Currie — a top 20 investor — did the obvious thing: they popped over to the local Warhammer shop, in Leeds.

“It’s important to go in and actually see the product,” he told FTAV:

We got our pinnies on over our chinos and shirts, and we sat down for an hour and painted some figures.

Bullas’s excursion sold him on the hobby’s appeal — although he himself didn’t become a convert.

Clone wars

There’s an obvious question that GW’s success prompts: if it’s so easy, why doesn’t everyone do it?

Alphaville spoke to several analysts and investors about this, and the answers largely went along these lines: it’s hard to get tooled up to the level GW is, and, more importantly, the company has decades’ worth of IP and loyal users.

Peel Hunt estimated the cost of “replicating” Games Workshop would be about half a billion quid, with the biggest chunk of that including IP generation.

Analysts Charles Hall and Andrew Ford wrote:

Clearly this is a considerable investment, but the returns that Games Workshop makes could still make it tempting. The problem would be that you would have to be confident of taking significant market share, there would be no back-sales for a material period, and it would take many years to generate any meaningful royalty income. Furthermore, there has been continuous development (such as in stories and characters) over many years, which would take a long time to replicate.

A couple of thoughts about that estimate:

— £500mn isn’t that much money in the grand scheme of things;
— But several things here are, obviously, impossible to price: you could throw as much money as you want at some concept artists and writers, but you might never come up with something that has the raw appeal of the Stompa.

There are also significant network effects at play. Warhammer is the biggest name in tabletop gaming. So, if you want to play tabletop games, your best chance of finding some friends to do it with is by playing a GW game.

That’s not to say they don’t have rivals (particularly, it can be argued, in paint production), but nobody comes close to the company’s scale, retail footprint and production capabilities.

At the moment, at least. But manufacturing companies with a seemingly wide moat have been done in by China before. It could happen again.

One often-cited danger is 3D printing, the idea being that hobbyists could end up cutting out the production middleman by making their own models at home — including, possibly, by people pirating GW’s design. It’s undeniably a risk. The tech isn’t there yet (both in terms of tools and materials), but that’s rarely a comforting argument.

Of movies and (mostly) men

Another big potential growth area is women. Based on SimilarWeb stats on who is visiting GW’s websites, Peel Hunt reckons the hobby is split about 4:1 in favour of men (the company itself is 3:1 men:women). We’d caution against assuming too much from web traffic stats, but it’s a rough guide.

“There’s a huge amount of white space here,” says Patrick O’Donnell at Goodbody, one of the few analysts that cover Games Workshop.

Who is Warhammer for? It’s a question that occasionally bubbles up, with the most prominent recent example in 2021, when a player turned up a competitive 40k tournament in Spain wearing a swastika and other Nazi iconography.

In a statement in response to the incident — “The Imperium Is Driven by Hate. Warhammer Is Not.” — GW said:

Warhammer 40,000 isn’t just grimdark. It’s the grimmest, darkest.

The Imperium of Man stands as a cautionary tale of what could happen should the very worst of Humanity’s lust for power and extreme, unyielding xenophobia set in. Like so many aspects of Warhammer 40,000, the Imperium of Man is satirical…

We believe in and support a community united by shared values of mutual kindness and respect. Our fantasy settings are grim and dark, but that is not a reflection of who we are or how we feel the real world should be. We will never accept nor condone any form of prejudice, hatred, or abuse in our company, or in the Warhammer hobby.

If you come to a Games Workshop event or store and behave to the contrary, including wearing the symbols of real-world hate groups, you will be asked to leave. We won’t let you participate. We don’t want your money. We don’t want you in the Warhammer community.

It followed a similar statement in 2020, amid the protests following the killing of George Floyd in America:

The satire element can be overstated. While GW’s early work was packed with jokes and popular culture references — there’s a long-standing, if credibly challenged, fan theory that space ork warlord Ghazghkull Mag Uruk Thraka is named after Margaret Thatcher — the modern lore can be pretty sincere. But the overall message is clear: all are welcome.

Putting that into practice is a little trickier. As mentioned earlier, Space Marines — and more specifically, Ultramarines — are the literal poster boys of Warhammer. But Ultramarines are 8ft-tall, religiously fanatical, fascistic warriors, gene-altered and pumped full of chemicals to a point of ultraviolent transhumanism, their skin altered to be harder than steel, wielding weapons that land somewhere between a sword and a chainsaw. Can such an entity ever have mass appeal?

That’s probably one of the biggest questions regarding the Amazon deal. All the sellside commentary surrounding it positions a potential series as great for licensing revenue, but as mattering more in terms of bringing greater awareness to the hobby.

Juve enters

A stereotypical life trajectory of an adult Warhammer fan might go something like this:

— As a young teenager, they get into the hobby;
— They then discover things like sex and alcohol, and waste several years of their life on those;
— In their late twenties or early thirties, they find themselves with more disposable income, and decide to return to the world of plastic.

The pandemic may well have accelerated this dynamic by giving people a vital extra piece: time.

The sales pitch to teenagers has worked so far — in part, because the hobby can appeal to parents, who typically control the creds purse strings at this stage: it doesn’t majorly involve screens, it encourages creative thinking and craft, and the gaming elements are fundamentally an in-person interaction. There’s anecdata suggesting it’s particularly useful as a learning tool for people on the autistic spectrum, offering a framework for co-operation, disagreement and competition.

But the key dynamic for GW seems to be this: constantly getting more teenagers into the hobby, and hoping they come back as adults. It’s worked, more or less, for 40 years. But past performance is not indicative of future results.

It’s at this entry level where the Amazon deal may matter most. And hopes are certainly high, following news that the companies had agreed creative deadlines — but that an end-product may be a “number of years” away.

“Although still some way out, we see scope for an Amazon/Warhammer production to be a game-changer in terms of global awareness of, and demand for, core Warhammer product,” Jefferies analysts Andy Wade and Grace Gilberg wrote in a note responding to the announcement.

Is a mass-market TV series, or movies, the way to accelerate this dynamic?

The hope among investors and analysts seems to be for something comparable with Peter Jackson’s Lord of the Rings movies, released at the turn of the century. As well as being critical and box office successes, they sparked a huge merchandising and had a huge impact in terms of mainstreaming geek culture.

But the LotR movies were rated PG-13 in the US, and a mixture of PG and 12a in the UK (OK, sure, that Denethor scene deserved an 18 rating).

Can 40K be done justice in PG-13? We’d argue not, which makes the clearer parallel something like Game of Thrones. Which was absurdly popular, but might not be a viable hit with younger teenagers.

Aiming for universal appeal could also be a double-edged chainsword. Like many fandoms, GW has fans who will complain if the 40K is dumbed down too much, made too child-friendly, or if it goes “woke” (because people are people, there is likely to be a cataclysmic event in pockets of the online discourse if GW ever reveals a female Space Marine).

Do these people matter? Will they go anywhere else? “It is a risk, absolutely,” says Bullas.

[GW] have got to work very closely with Amazon to make sure that yes, it’s authentic, absolutely, but also you clearly don’t want to alienate or exclude large swaths of the population . . . they have to really tread an absolute line to be true to the authenticity of the stories and the world, but at the same time make [content] that is appealing to as many people as possible.

Still, the Amazon deal is arguably the icing on the cake for a company that has been doing just fine on its own, thank you very much.

“If they get it badly wrong — yeah, it’s a dampener, but it’s not going to kill off a hobby that‘s been around for 40 years-plus,” says O’Donnell.

Ultramarine blue-chips

It’s not just GW’s balance sheet and product lines that are odd.

The company, as a rule, does not speak to the media (FTAV didn’t bother contacting them for this piece). It doesn’t offer much to analysts in terms of guidance. Likewise, its communications are minimal (simple, black-and-white annual and semi-annual reports, with occasional trading updates between). It pays dividends when it can, rather than following a strict calendar.

Investors seem to adore these quirks (journalists like them less, but who cares about journalists?) in a sea of bland, standardised investor relations. “I absolutely love the way they present their accounts,” said Ashworth-Lord.

I just hope that becoming a FTSE 100 company they aren’t forced into changing anything that they do. I hope to God they don’t start going into quarterly reports and for regular dividend calendars.

Even its chief executive, Kevin Rountree — formerly of the firm now known as PwC, and farmer-and-British-posho apparel provender Barbour — has virtually no profile (the Sunday Times, which recently listed Rountree as one of its businesspeople of the year, had to use a photo of an Ultramarines Space Marine instead).*

“He’s a real person — he’s not some kind of character out of Warhammer 40k,” Ashworth-Lord told us.

He’s a Geordie actually. Well, I assume he’s a Geordie, he’s got a north-east accent and think it’s a Geordie accent, I don’t think it’s Teesside or anything like that.

(Obviously, if someone does have a photo of big Kev or wants to let us know if he’s a slandered South Shields sand dancer or similar, we’re contactable in the usual ways.)

Another area with blue-chip status that could accelerate things is over ESG — GW has a good argument for supplying the S and the G, but it’s hard to make an environmentalist argument for a company that uses quite so much plastic.

Answers could quickly become apparent, as the company becomes a default buy for any funds that track London’s most prestigious equities. “This has been a hidden gem on UK markets for a long time,” says O’Donnell. “I think it’ll probably get even more investor attention now.”

The grim darkness of the far future

There are plenty of reasons to believe that GW’s success can continue, if the company can keep renewing its users while maintaining the fanatical devotion of its existing fans. There’s also clearly a bigger market out there for its products, albeit one that may prove tricky to reach.

There are also risks. The products lose their appeal. Pricing becomes too much of a barrier. A credible competitor emerges. Disruptive technologies like 3D printing prove too disruptive. High market expectations are simply not met: the hobby cannot be translated en masse to fundamentally different markets, like Japan or, uh, women. Private equity or Big Tech decides to buy and ruin the company.

But for now, Games Workshop is a huge, homegrown success story for London — a stock market that hasn’t had a lot of wins lately. We’ll raise a glass of Wild Snake to that.

Further reading:
— Games Workshop: IP freely

*The Games Workshop wiki page for Rountree has a photo of The Times’s chief business commentator Alistair Osborne instead. Content is hard.