Colin Sebastian from Baird published an earnings review/King acquisition analysis on Activision (NASDAQ: ATVI) this morning before the open. Strong results and a solid strategic foundation for the acquisition make him believe that guidance will prove to be conservative. No change to rating or EPS estimates. It is likely that this acquisition will allow the company to leverage its internal IP more effectively on mobile platforms.

ATVI reported 3Q non-GAAP revenues of $1.04B vs. consensus of $953M, driven by record digital revenues ($697M; +38% Y/Y), while non-GAAP EPS of $0.21 was well above guidance of $0.14 and consensus of $0.16.

Activision Blizzard is buying into the casual mobile market through the acquisition of King Digittal. ATVI will aquire KING for $18/share in cash (10x EPS vs. ATVI 20x), a 16% premium to the November 2 closing price. The combined companies would have TTM revenue and EBITDA of $6.8B and $2.5B, respectively, and is expected to be 30% accretive to ATVI's 2016 non-GAAP revenue and EPS

The analyst believes the strategic rationale for the acquisition is solid despite the high price tag and the fact that the Candy Crush saga is in decline. However, upon the completion of the transaction, the combined company will have over 500 million MAUs across 196 countries and strong wholly owned IP (not reliant on licenses).

The firm maintained an Outperform rating and $36 price target on ATVI.