The Case for Apple's Stock Price Falling to $270

Apple has been slumping. In September, the stock hit an all-time high of $705. On Monday morning, it briefly traded below $500 in pre-market trading. (As of 11 a.m. ET, it was back up around $507.) At least one analyst predicts it has much further to fall. Since January, Edward Zabitsky of Toronto-based ACI Research has been arguing that Apple (AAPL) is headed to $270 a share. He now sees the stock reaching that level in 12 months. Zabitsky, who is ranked as analyst tracker StarMine’s top semiconductor and semi-equipment stockpicker, says his bear case for Apple comes down to increased competition; the diminishing appeal of its closed-architecture App Store experience; and questions about management and Apple’s ability to innovate more than a year after the death of founder Steve Jobs.

Here’s his case against Apple.

Competition from Microsoft
Microsoft (MSFT) continues to execute on its efforts to regain relevance with consumers and maintain its dominance of the corporate market. Core properties Office, Skype/Lync, Xbox, and Skydrive are becoming available across multiple platforms. Microsoft’s strategy is to extend its dominance in enterprise, desktop, and notebook computing to tablets and phones.

Competition from Samsung
Samsung (005930) is the smartphone leader. The Galaxy S II and Galaxy Nexus allowed Samsung to gain market share from other Android vendors. Now the Galaxy S III and Galaxy Note II are threatening Apple’s dominance of the high end. Samsung has sold more than 30 million GS3s and 5 million G-Note 2s. Those phones are leading the way to larger displays for video consumption. The G-Note’s multi-window interface is probably Samsung’s greatest UI enhancement to date. The GS3 is a serious challenger to the iPhone.

Web Apps vs. the App Store
The rollout of 4G networks is vastly expanding bandwidth, while advances in Web standards are allowing Facebook (FB), Amazon (AMZN), Netflix (NFLX), and YouTube to take control of their presence on phones. They are using Web apps to avoid the App Store, and consumers are noticing. That iPhone 5 customers unhappy with Apple Maps are easily able to switch back to Google Maps (GOOG) shows that Apple’s grip on the consumer—and its ability to extract high profit margins—is weakening.

Leadership
Management discord in Cupertino, as illustrated by the recent ouster of Scott Forstall, the head of Apple’s iOS software group, is another cause for concern. Apple, Zabitsky argues, must “develop a more unified approach between its Mac and iOS groups. More than a great innovator, Steve Jobs was a unifying force who was able to challenge people to bring their best game.” He says he doesn’t believe the Apple Maps fiasco would have happened under the late founder.

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Oil Prices Keep Falling, But a Strange Gap Persists

Oil prices are down more than 20 percent since mid-March. Yet that hasn’t erased a strange anomaly in the market: the gap between two essentially identical types of oil. North American light, sweet crude, also known as West Texas Intermediate, trades just below $84 while its international equivalent, known as Brent, is priced at $97.

Why would two similar products sell for such different prices? The problem is getting hold of WTI and connecting supply with demand. The gusher of new domestic oil production coming out of shale deposits in North Dakota, Texas, and Oklahoma has outstripped the country’s pipeline capacity to move it around. The result is a supply glut that has built up in the middle of the country, lowering the price of WTI. Refineries along the Gulf Coast would love to get their hands on more cheap domestic crude, but they can’t simply call an oil supplier and have a load of cheaper WTI delivered whenever they want. While pipeline projects to solve the problem are just getting underway, there’s still no easy way to get large quantities of WTI down to the country’s refining hub along the Gulf Coast. So refiners remain trapped, forced to keep taking more expensive imported oil.

The discrepancy has lasted a lot longer than most people thought. Although they’ve traded within a dollar of each other for the bulk of the past 20 years, starting in August 2010, WTI began trading below Brent by about two to three dollars. By February 2011, the spread widened to $20 as domestic production ramped up and turmoil hit the Middle East with the Arab Spring, spooking markets with concerns over threats to supply. The gap peaked at $27 last October, when Brent was trading at $114 and WTI was close to $87. The gap is currently about $13.

One of the big debates in the oil market right now is how tight that spread will get over the next half a year. Opinions vary considerably. The energy guys at Goldman Sachs, led by analyst David Greely, think that by the end of 2012 the price of WTI will be just $5 below Brent, largely because new pipeline projects, such as the recently reversed Seaway, will allow more domestic crude to reach refineries along the Gulf Coast, making WTI more valuable. In essence, the more domestic crude that reaches the Gulf Coast, the stronger the floor beneath the price of WTI becomes.

At the same time, though, domestic production shows no sign of abating. The number of oil rigs drilling in the U.S. has risen to 1,400 from 984 last June, a 43 percent increase. That extra supply should provide an equally strong (if not stronger) ceiling on the price of WTI. As a result, many analysts think the WTI-Brent spread will persist in double-digits for the foreseeable future. “Five dollars is not likely,” says Fadel Gheit, an analyst at Oppenheimer. “And even if it does go to $5, it’s not going to stay there.” Gheit points out that as long as WTI stays above $70, drilling companies can still make money producing new wells, which in turn, he says, will keep WTI anywhere from $8 to $12 below the price of Brent.

This price gap has created an arbitrage opportunity for some enterprising oil traders. For those who can buy domestic oil cheaply and have the means—either by leasing barges or rail cars—to move it down to the Gulf Coast, they can make money by selling it to refineries at a higher price. The tighter that spread, the trickier that trade becomes. Yet $13 is still a big enough window to make it work.

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Falling Oil Prices Are No Mystery

Oil prices have fallen sharply in the past two months, with Brent crude sinking to $97 a barrel and West Texas Intermediate hitting $83. The explanation is simple: Since March, the world has been producing more oil than it’s consuming, according to data gathered by the Energy Intelligence Group. Global oil consumption has been declining since the end of 2011, falling to 88.5 million barrels per day at the end of April, from 90.4 million barrels per day in late December 2011. At the same time, world oil production has risen steadily for more than a year, driven by new finds and drilling techniques in North America and a 10 percent increase in production from OPEC during the past 12 months. The last time supply outstripped demand was in 2006.

The U.S. is now sitting on more oil supplies than it has since 1990. And yet our demand for it is at close to a 15-year low—a result of economic weakness and increased energy efficiency. “The amount of oil it takes to move the economy is declining,” says Fadel Gheit, an energy analyst at Oppenheimer.

The price declines have coincided with a steep selloff in oil futures contracts over the last two months. Speculators cut their net-long positions—bets that the price will rise—to the equivalent of 136 million barrels of oil, the lowest level since September 2010, according to the Commodity Futures Trading Commission. This follows a huge speculative buying binge. Oil prices spiked from October through March—a six-month bull run fueled by speculative worry over an Iranian supply disruption.

With speculative money pouring out of the oil market, the price is closer to reflecting supply-demand fundamentals. And that means the world’s two most traded oil contracts should continue to fall in price through the summer, analysts say. Religare Capital Markets forecasts that Brent crude, the benchmark for more than half the world’s oil, will fall to $90 a barrel by September, and that West Texas Intermediate should fall to $80.

Since two-thirds of the price of gasoline is determined by the price of oil, that should continue to lower prices at the pump. At the end of May, the average price of a gallon of gasoline in the U.S. was $3.66, 12? lower than it was a year ago. That will provide some relief at the pump in time for the summer driving season. Whether that amounts to enough of an economic stimulus for consumers to help lift the economy is much less clear.

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