Ascend Communications manufactured wide-area network access products that let users build videoconferencing as well as voice, video and data integrated networks. The company was incorporated in 1989 and the tech stock had its initial public offering in May 1994, amid a difficult market year. Morgan Stanley was the investment banker.
Ascend had 700 customers in early 1994 and had installed more than 4,500 products. They faced competition from companies such as Promptus, 3Com, Cisco Systems and Newbridge Networks. Its products were instrumental for dial-up internet service providers such as AOL and EarthLink, and Ascend grew as the internet got into more homes.
Sales increased more than 100% in 1992 and 1993. Ascend became profitable in 1993 and more than doubled its profits in 1994 as well as its return on equity at 32.7% and pretax margins at 25.2%. Research and development spending was 12% of sales.
Beginning with the September quarter of 1994, sales accelerated for seven quarters with gains averaging more than 100%. The price-to-earnings ratio at the first breakout in July 1994 was 45. By January 1996 the P-E ratio was 146.
Lessons To Learn From This Tech Stock
There are many critical lessons to learn from Ascend Communications. One, the EPS growth rate percentage is much more important than the P-E ratio in most cases. Two, recent IPOs with big earnings and sales increases can form what we call IPO chart bases. They are worth researching.
Three, every market cycle is led by America's entrepreneurial innovators with unique, valuable new products and services. It's up to you to keep your eyes open, get yourself prepared and don't get sidetracked.
And four, learn to read charts well. If you missed the early first and second buys, Ascend corrected and built a base-on-base in November 1994 due to the S&P 500 correcting sharply and making new lows.
But Ascend only had a normal pullback to its 10-week moving average line and the top of its prior base. It came nowhere close to making a new low below its prior base as the S&P 500 did. This showed huge counter-strength.
As soon as the market started to move up, the tech stock broke out at a split-adjusted $4 and ran to $70 before it ever closed a week below its 10-week line. That's an increase of more than 1,600%!
History Repeats Itself
Now here comes an eye-opening zinger. Ten years later, in July 2004, Apple did exactly the same thing. It built an eight-week, base-on-base that pulled back to its 10-week moving average and the top of a prior six-week base while the S&P 500 collapsed to new lows. Apple was showing strong counterpower and, as soon as the market turned up, Apple broke out at $17 and ran to $700!
Both stocks had similar per-share earnings growth when they broke out. Ascend was +200% and Apple was +233%.
It's wake-up time. History constantly repeats stock patterns in the market. Maybe it's time you get determined to always recognize and never miss another base-on-base or cup pattern in the future. You can do it.
Editor's Note: In 1999, Ascend was acquired by Lucent Technologies, which is now part of Nokia.
This column originally ran in Investor's Business Daily as part of a 2012-14 series on America's greatest stock opportunities written by IBD's founder, the late William J. O'Neil. See more stories in this series.
