Apple's Stock Falls on iPhone Fail but It's Still a Bargain

Last Updated Oct 5, 2011 4:21 PM EDT

It's said that the most important part of a CEO's job is managing Wall Street's expectations. In that regard Apple's new chief Tim Cook failed with the launch of the iPhone 4S in a way former CEO Steve Jobs hardly ever did. Apple's stock initially tanked on the news.

The market, driven by hedge funds and their robot cousins, was expecting a full-fledged upgrade -- a brand-spanking-new iPhone 5 -- and it got something less. So what's in a name? Only as much as 13 billion bucks in market value during the worst of the sell-off.

Shares in Apple (AAPL), the world's second biggest publicly traded company after Exxon Mobil (XOM), eventually bounced back Wednesday, closing up 1.7%, or $6.24, at $378.74. The stock took a heckuva round-trip to get there, though.

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Apple fell 7 percent from it's intraday high to its intraday low Tuesday, all on deflated expectations. Although shares recovered to end that session down less than 1 percent, Wednesday brought even heavier selling until mid-day. Apple's stock was off as much as 3.3 percent soon after the opening bell, hitting a low of $360.30 a share.

So, from the close before the iPhone announcement to Wednesday's intraday low, Apple shed about $13 billion in market value before traders came back to their senses. That's what happens when more than 925 million shares priced at about $375 a pop drop a few percentage points.

The new iPhone is faster, has a better camera and allows users to sync content without needing a computer. It includes a futuristic, voice-activated service that responds to spoken commands and questions such as "Do I need an umbrella today?" It will now be available to Sprint (S) customers as well as those from AT&T (T) and Verizon Wireless (VZ).

But Apple named it 4S when most people were expecting the iPhone 5. Immediately, tech bloggers and Apple fans alike began to wonder if this new iPhone was not as cool as they had hoped.

Even though the iPhone 4S is an improvement over its predecessor, it isn't being perceived as a breakthrough partly because it's not being branded as an iPhone 5, as most people had been expecting, said Prashant Malaviya, a marketing professor at Georgetown University.

Bargain Stock
But Apple investors should step back and take a deep breath. The market threw a toddler's tantrum when it didn't get its iPhone 5. It was a knee-jerk reaction by speculators, not investors.

It takes great gobs of institutional interest from hedge funds, proprietary trading desks and high-frequency firms to make 7 point intraday swings in a stock like Apple.

The price per share and market cap are far too big for daytraders to make a dent. And mutual funds and pension funds (at least one would hope) take a more patient, sober approach to investing.

Long-term investors in Apple remain in fine shape. The stock trades at just 12 times forward earnings and only 15 times trailing earnings. Those are both almost 50 percent below Apple's own five-year averages, according to data from Thomson Reuters.

The stock looks like a big bargain at these levels. If you're dollar-cost averaging into Apple shares, you get more bites at cheaper prices every time traders oversell on the news. You're buying low.

The Associated Press contributed to this story.
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    Dan Burrows, a veteran of Aol's DailyFinance, SmartMoney and MarketWatch from Dow Jones, covers the markets and economy with an eye toward investing for the long haul.

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