Buy This 290% Gainer's Breakout for Potential Double-Digit Profits

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In Greek mythology, Pandora was the first human female created by the gods. As the gods created her, each gave Pandora a special gift. Apollo bestowed on her the gift of music.

Fast forward about 3,000 years, and an Internet radio company that has taken her namesake could have a gift for investors. Pandora Media (NYSE:P) has that attractive combination of a strong chart and an outstanding fundamental growth story.

Fundamentally, in the most recently reported fiscal third quarter, the company posted 50% year-over-year revenue growth, with sales reaching $180.4 million. And the number of active listeners rose 20% from the year-earlier period to 70.9 million users. 

Pandora is a free service, although it does offer a paid premium service. However, its free offerings can be highly profitable for the company since its growing user base has caught the attention of advertisers. Mobile ad revenue is a tremendous growth area for the company. In the third quarter, mobile ad sales hit $104.9 million, a 58% increase from the comparable year-earlier period.

Pandora's mobile ad platform is very attractive because the site specializes in collecting and aggregating user data based on listening preferences. This capability allows advertisers to accurately market products to very specific target markets.

In 2012, the global mobile ad market was worth about $8.3 billion, according to research firm ZenithOptimedia. By 2015, it's expected to balloon nearly 300% to a $33.1 billion. Pandora is currently the third largest mobile ad player, as measured by revenue, behind only Google (GOOG) and Facebook (FB), according to research conducted by eMarketer.

From a technical standpoint, the chart certainly appears bullish.

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P Stock Chart

Rising off a November 2012 low of $7.08, P formed a major uptrend and is up almost 290% in just over a year.

In September 2013, the stock neared $28, but struggled over the autumn months to move higher. A strong shelf of resistance formed just below the $28 level and lasted about eight weeks. In late October, shares finally managed to push through $28 resistance, reaching an all-time high of $31.94 in mid-November.

Since touching this high, P has retreated, and shares are currently hovering just below the $28 pivot point. Important support -- marked by the intersection of the major uptrend line -- lies below at just above $25.

As long as P holds this support, shares are likely to again penetrate $28 resistance. If the stock can take out the $31.94 peak, it could potentially soar, as no historical resistance would be in sight.

While shares are currently trading at an attractive entry price, my risk-adverse strategy is to buy the stock only when it again breaks above $28 resistance. A moderate but realistic price target is the previous peak of $31.94, presenting traders with attractive 14% potential returns.

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The strong technical outlook is supported by upbeat fundamentals.

Because Pandora is in the process of converting to a calendar-based fiscal year, upcoming reporting cycles are in transition. That said, for the three months ending Jan. 31, 2014, the company expects revenue will be in the range of $185 million to $190 million, at least a 48% increase from revenue of $125.1 million in the comparable 2013 period.

For the 12-month reporting cycle ending Jan. 31, management anticipates revenue will come in between $657 million and $662 million, marking at least a 54% increase from revenues of $427.1 million in the comparable 2013 period.

The earnings outlook is similarly solid. For the three months ending Jan. 31, Pandora expects diluted earnings per share (EPS) to be in the range of $0.02 to $0.04, up from a loss of $0.04 per share in the comparable year-ago period.

Based on increasing listener numbers and growing ad revenue, management expects earnings for the 12-month period ending Jan. 31 to be between $0.03 and $0.05 per share. In the comparable year-earlier period, the company reported a loss of $0.08 per share.

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In addition, the company has a healthy balance sheet with $447.8 million in cash and no long-term debt. This liquidity should give Pandora the continued ability to develop algorithms that tap user preferences to further drive mobile ad revenue.

Risks to consider: The digital music market is competitive with players like Apple's (AAPL) iTunes Radio and Spotify vying for Pandora's listeners. However, Pandora has a unique platform for collecting user data and music preferences, which should enable it to keep pace with the competition.

Recommended Trade Setup:

-- Buy P on a break above $28.05
-- Set stop-loss at $25.39, just below support marked by the intersection of the major uptrend line
-- Set initial price target at $31.94 for a potential 14% gain by summer 2014

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