Activision Blizzard (ATVI) announced strong quarterly results that beat street estimates on sales and earnings per share while raising full year guidance. The updated full year guidance is slightly below street consensus estimates, but seems understandably conservative ahead of ATVI’s launch of the next iteration of their most important franchise, Call of Duty: Black Ops III, which could make or break their full year results.

The bigger story at ATVI is the announced acquisition of King Digital Entertainment (KING), a leader in mobile gaming and creator of popular franchises such as Candy Crush. From a financial perspective, the deal appears to be good for ATVI. The company estimates that the acquisition will be highly accretive, adding approximately 30% to next year’s earnings per share, implying a jump from previous estimates of $1.57 to $2.04. KING currently trades at a large discount to established gaming companies like ATVI due to a comparative lack of diversity in game offerings and potentially declining interest in currently popular franchises.

The KING acquisition appears to be a great use of overseas cash that is currently earning nothing. Instead of waiting for clarity from the Federal Government on the possibility of repatriating overseas cash at a discounted tax rate, or choosing to pay full taxes to bring the cash back to the U.S., ATVI chose to buy a hopefully steady stream of free cash flow. The deal also strategically diversifies ATVI by bolstering their mobile game offerings and creating a new avenue for growth. Additionally, there may be revenue synergies from cross-promotion of the combined company’s franchises, which could help lower marketing expenses and drive incremental sales.

Overall, the KING acquisition appears to be good for ATVI as long as income from Candy Crush and other KING franchises does not decline faster than currently expected. The KING deal in combination with ATVI’s exciting pipeline of upcoming product launches and strong execution leave us feeling positive on the company’s outlook. ATVI has already been one of Northlake’s biggest winners this year rising 80% from the low $20’s to the mid-$30’s. While we plan to take a deeper look at the risks related to the KING acquisition, we currently believe that shares of ATVI could trade at 20x 2016 EPS of $2.04, pushing the stock into the low-$40’s.

ATVI is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  ATVI is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.