There has been a large amount of news coverage this week for Bitcoin as it reached a fresh high for 2020 at $9,745. Indeed, with some forecasters saying that the path is cleared to a move to $14,000 in the short term, this could present a huge profit if realised for some investors.
As we have seen in previous years though, the high volatility of Bitcoin means that large profits can be wiped out very quickly with a sudden sell-off (often with no fundamental reason). Trying to accurately predict gains for the long term has proved almost impossible.
From my point of view, I would much rather invest in a sound company that I believe has potential to grow for the long term, but without the extreme volatility of a commodity like Bitcoin.
To this end, let’s look at one company with plenty of potential.
Let’s play a game
If you take a look at the share price over the past five years for Games Workshop (LSE: GAW), you’ll see a very strong performance. The business has gone from strength to strength, capitalising on a growing market in general.Â
I wrote a piece flagging how an investment of £1,000 five years ago would now be worth over £12,000. In my opinion, this growth is sustainable and is supported by the financials of the business.
While some criticise it for not having any debt on the balance sheet to fund growth, I think that the business is happy with growth through organic means and no debt is a great position to be in. A good example of this is growth in the third-party distribution arm of the business. The wholesale arm grew by 27% in the second half of last year, accounting for around half the firm’s income.
In my opinion, it makes more sense to push growth through this channel and increase retained profits via cash than by raising funds in the debt market.
Is the share price too expensive to buy now? A very good question as the P/E ratio stands at 32, which is high. Yet the business does not have a huge market capitalisation yet, and still sits in the FTSE 250 and I think it can easily grow further without reaching any glass ceilings. Even if you do think it looks a bit expensive, you can look to offset any short term pullback by a dividend that is starting to be paid.Â
The lack of debt and solid revenue growth has meant an abundance of profits are starting to be distributed. In 2018, the dividend was 68p per share, and last year it rose to 100p. The actual yield sits at a modest 2.65%, but I expect this to grow as the dividend payout likely will be upped on performance again this year.
Overall, flash-in-the-pan spikes (as we see at Bitcoin or like we have seen with Tesla this week) can provide short-term profits, but I much prefer to invest in more linear share price growth over several years, which is I like Games Workshop.