The Games Workshop (LSE:GAW) share price has had a pretty rough month. Despite management reporting growing sales, the stock is down over 20% since early September. And this recent downward pressure has actually pushed its 12-month performance into the red with a -9% return. So what happened? And is this a buying opportunity for my portfolio?
The falling share price
Typically, double-digit declines like this are triggered by a disappointing earnings update or a scandal. But in the case of the GAW share price, that’s not what’s happening. Instead, the large sell-off appears to have been triggered by a single line in the latest trading update that mentioned rising freight costs.
The vaccine rollout may be making good progress around the world. However, the virus continues to wreak havoc across supply chains and logistics networks. Just recently, here in the UK, these disruptions have led to a country-wide fuel shortage. And it seems Games Workshop is suffering from the problems too.
With the cost of raw materials and transportation rising due to Covid-triggered inflation, the company may soon be facing a slowdown in sales. After all, Warhammer figurines are expensive at the best of times. And if consumers need to reduce spending to afford the higher prices of necessities like food and utilities, this company’s products may be the first on the chopping block from shopping lists, even with Christmas just around the corner.
With that in mind, seeing the GAW share price tumble is not too surprising. But is the market over-reacting?
Future growth on the horizon
While Games Workshop generates most of its revenue from selling tabletop figurines, it’s not a one-trick pony. The company has long been licensing its intellectual property to various video game studios that pay royalty fees. And more recently, management has been preparing to launch a new streaming service called Warhammer+. Users will pay a monthly subscription and can access a host of different content. This includes animated shows, gaming and painting tutorials, as well as an abundance of world lore materials.
These relatively new and upcoming revenue streams will undoubtedly need time to mature. And thus, they won’t offer much protection against the effects of incoming inflation. However, over the long term, they may evolve into a substantial contributor to the bottom line.
Time to buy?
The risk of an upcoming sales slowdown is concerning. However, the catalyst stems from temporary issues in the supply chain. Personally, I believe these problems will eventually be resolved as the adverse effects of the pandemic continue to reduce. So to me, the recent drop in the GAW share price looks like an excellent opportunity to add this business to my portfolio, despite the risk of short-term volatility.