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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What If Speed Traders Competed on Price?

In high-frequency trading, speed means everything. With most firms using sophisticated trading algorithms to scour the stock market for tiny price differentials, the trick isn’t so much spotting the profit opportunity, but getting there first. Which is why HFT firms put so much effort (and money) to upgrading their computers while paying steep fees to locate their servers next to those of the exchanges. There’s even a rush to spend millions improving the world’s fiber-optic cables so HFTs can shave a few milliseconds off execution times—reducing “latency,” in industry parlance.

Some see this arms race in speed as a waste of time, money, and talent. If everyone’s continually getting faster, the relative speeds stay the same, but costs continue to rise. One former high-frequency trader has a proposal to slow things down. Chris Stucchio, a math PhD who spent a few years working at a New Jersey high-frequency trading firm, argues that if stocks were allowed to be priced in increments below one penny, HFT firms would have to compete not just on speed, but on price as well.

The Securities and Exchange Commission requires stocks to be priced in 1? increments, a rule that reduces the ability of trading firms to compete on price. As Stucchio sees it, if stocks could be priced in sub-penny increments—say, half a cent—then HFT firms would be forced to compete on two fronts, not just one. In theory, firms that offer better prices would be rewarded, not just the ones claiming the trade a micro-second faster than everyone else.

According to Stucchio, the benefits would be two-fold: “Trading for retail investors would be cheaper and the profits of high-frequency trading firms would be reduced,” he says. Making high-frequency trading less profitable would be a good thing, Stucchio believes, because it would encourage a bunch of smart people to leave the industry and do something of greater social use. Like making the Internet itself a whole lot faster.

It’s an interesting theory. But Ben Van Vliet, a professor at Illinois Institute of Technology and an expert on high-frequency trading, believes sub-penny pricing would put an even greater premium on speed. When the SEC reduced the pricing increments—or spreads—from 12.5? to a penny in 2000, speed became more important, he says, adding, “I don’t see why it would be any different this time around.”

Whether we like it or not, speed is now part of the market. HFTs need it to make their operations profitable. And the exchanges have come to count on the constant flow of high-frequency trades to create the liquidity that allows markets to function smoothly. Reducing the role of HFTs would probably require a complete overhaul in how the markets operate. Still, Van Vliet has a suggestion for how to pull back on the speed arms race: “Go back to dollar spreads and guys in funny colored coats on the exchange floor.”

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Facebook Falls Below Its IPO Price

(Updated with Monday’s closing price.)

Less than an hour into only its second day of trading, 88 million shares of Facebook (FB) had changed hands and the price was down 12 percent from Friday’s close of $38.23. (The shares closed Monday at $34.03.) In other words, you could buy this most anticipated of initial public offerings at a substantial discount from the price that Wall Street reserved for its preferred clients.

With a valuation of $104.8 billion at the May 18 close, Facebook was already worth more than three times the other 10 U.S. consumer Internet companies to have gone public in the past year; LinkedIn (LNKD), valued at $10.3 billion, is second.

“IPOs are scary things,” says blogger and newsletter writer Eddy Elfenbein. “It’s hard to justify Facebook going for sixty times” next year’s estimated earnings, he adds, “in a market where Apple (AAPL) is going for less than 10 times next year’s estimate.”

So what price can be justified? Elfenbein calculates that Facebook’s estimated 2013 earnings of $1 a share, combined with its projected 50 percent earnings growth rate for the next five years—and there’s no guarantee the company will meet those estimates—give it a fair value of $33 a share. Even so, he says buying the stock would be prudent only at closer to $23.

You may get that chance. Another analyst, PrivCo’s Sam Hamadeh, points to concerns about Facebook’s fundamentals: declining first-quarter advertising revenue; the number of unique visitors to Facebook dropping in the U.S.; the company warning in its most recent S-1 filing that the shift to mobile access vs. desktop access could complicate its ad business. He also anticipates a wave of new stock hitting the market once insiders are free to unload their holdings, and predicts that others will sell to raise money to pay taxes on their gains.

“When you factor in that the lockup expires in November and tax-related selling, we think the shares, once the hype dies down, will be in the $20s by yearend—$24 to $25 per share,” Hamadeh told peHUB.

If Zuckerberg & Co. should want consolation, they need look no further than Google’s (GOOG) 2004 initial public offering. Few remember that the king of Internet search actually had to slash the price of its shares well below its earlier targets. It ultimately IPO’d at $85, which was far lower than management’s earlier indicated range of $108 to $135. And though GOOG did enjoy a nice Day One pop, it went to nowhere and back for the better part of a month—before more than quintupling in less than four years.

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The Price of Clean Air

By Paul M. Barrett

Illusration by Emily Keegin & Maayan Pearl

The Fisk Generating Station in the working-class Pilsen neighborhood on Chicago's Lower West Side once symbolized the future. The largest of its kind when it opened, the single-stack, coal-fired plant powered factories and residences throughout a growing metropolis.

That was in 1903. Today, Fisk and its slightly younger sister, the Crawford Generating Station, located nearby in another densely packed area, are relics: two of the more than 200 "legacy" coal-burning plants nationwide that were grandfathered in under 1977 amendments to the Clean Air Act. As a result of legislative compromise, these aging plants remain exempt from some of the act's main requirements that industrial facilities use modern pollution control methods.

Living in Pilsen provides a time-travel experience to an era when the air in American cities was grittier and more dangerous. "Around here, you get this thin gray film of dust on your windowpane and on the patio furniture," says Jerry Mead-Lucero, a local activist who lives near Fisk. "A lot of people don't have air conditioning, so the windows are open in the warm weather, and dust gets into your home or apartment."

And your lungs. Fine particulate matter, sulfur dioxide, and nitrogen oxide emitted by the Fisk and Crawford plants exacerbate respiratory and cardiac conditions, according to public health advocates. A study led by a Harvard School of Public Health professor and published in 2002 in the journal Atmospheric Environment linked the two Chicago plants to 41 premature deaths a year, as well as 550 emergency room visits. As if that weren't enough, Mead-Lucero points out, electricity from Fisk doesn't even go to local residents; the grid sends it to customers elsewhere.

Lawmakers gave Fisk, Crawford, and their ilk a Clean Air Act pass based on the expectation that the old plants would soon close anyway because of decrepitude and inefficiency. The act requires that if such plants are modernized, their owners have to bring them up to code. Congress didn't anticipate that some power companies would forgo modernization. "A lot of utilities have used chewing gum, duct tape, and rubber bands to keep the old plants running, while arguing in court that the changes are merely 'routine maintenance,'" says Henry Henderson, Midwest program director of the Natural Resources Defense Council. The nonprofit NRDC has sued—so far unsuccessfully—to try to force Fisk and Crawford to clean up or shut down.

The plants' owner, Midwest Generation, a unit of Rosemead (Calif.)-based Edison International (EIX), says that it cares about the environment and public health. It also says it obeys the Clean Air Act and all other relevant laws. Over the years the company has reduced the release of mercury and certain other contaminants, adds Douglas McFarlan, Midwest Generation's senior vice-president for public affairs. "We have no problem with the rules continuing to get tougher and tougher," he says. "Our analysis shows, though, that even if our plants closed, you would not see a real difference in Chicago. There are a lot of sources of pollution, and you have to look at the situation holistically."

The confounding problem of Chicago's antiquated power plants is more than a local concern. The situation sheds light on a debate unfolding 700 miles away in Washington over whether to step up enforcement of the Clean Air Act or slip back in the direction of Pilsen.

At least 19 Republican-sponsored bills have been introduced in both houses of Congress seeking to prevent the Environmental Protection Agency from taking actions such as limiting emission of climate-warming greenhouse gases and imposing tougher rules for ground-level pollutants such as mercury. Republicans and their industry allies warn that assertive regulation will hurt energy providers like Midwest Generation, killing jobs in a fragile economy. "Left unchecked, EPA's actions would have a devastating impact on jobs, U.S. competitiveness, and domestic energy prices," Representative Fred Upton (R-Mich.), chairman of the House Energy and Commerce Committee, said on Apr. 7 after the House passed legislation he wrote forbidding the EPA from regulating greenhouse gases under the Clean Air Act.

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TMX Group Says Price Isn’t Everything in Rejecting Maple Offer

May 21, 2011, 12:57 AM EDT By Doug Alexander and Matt Walcoff

May 21 (Bloomberg) -- TMX Group Inc. said just because a group of Canadian banks and pension funds is offering more to acquire it than London Stock Exchange Group Plc, it doesn’t make their proposal superior.

The Toronto Stock Exchange owner rejected an unsolicited bid from Maple Group Acquisition Corp. yesterday, affirming its friendly agreement with the LSE parent.

Maple’s plan “is a different proposal in that it does require a change of control as opposed to our current merger agreement with LSE Group, which is a combination of the holding company whereby our shareholders continue to share in the growth of the company,” Thomas Kloet said yesterday in a telephone interview.

The C$3.6 billion ($3.7 billion) proposal from Maple, a group of four Canadian banks and five pension funds, would also result in too much debt, TMX said in a statement. The company estimated an acquisition would boost its debt to 2.9 times 12- month earnings before interest, taxes, depreciation and amortization, from 1.1 now.

The leverage “generates much, if not all, of the earnings accretion referenced in the Maple proposal and could constrain TMX Group’s ability to execute and implement strategic opportunities,” TMX said in the statement.

Luc Bertrand, vice chairman of National Bank of Canada and a spokesman for Maple Group, said, “we are disappointed the TMX board has decided not to engage in discussions with respect to our clearly superior proposal.”

The group will “determine” its next steps, according to a statement yesterday.

Exchange Acquisitions

LSE’s bid for TMX was part of about $30 billion in takeover offers for exchanges globally in less than six months, as bourses try to cut costs and generate more revenue from trading in stocks, options and futures. Nasdaq OMX Group Inc. and IntercontinentalExchange Inc. dropped an unsolicited attempt to buy NYSE Euronext, owner of the New York Stock Exchange, on May 16 after battling with Frankfurt-based Deutsche Boerse AG.

Maple offered on May 13 to buy TMX for cash and stock valued at about C$48 a share. LSE’s Feb. 9 agreement would give TMX shareholders 2.9963 LSE shares for each TMX share. LSE investors would own 55 percent of the company, while TMX shareholders would hold the rest.

In comparison, under the Maple plan, TMX shareholders would get C$33.52 in cash plus 0.3016 of a Maple share for each TMX share. The group, which was created for this bid, would pay as much as C$2.5 billion in cash under the proposal, which is priced about 15 percent higher than the LSE offer.

Alpha Group

Maple also said it aims to acquire Alpha Group, a bank- owned operator of an alternative trading system that competes with TMX, and Canadian securities clearing house CDS Inc. after completing a takeover of the Toronto Stock Exchange owner.

LSE needs approval from Canada’s federal government as well as provincial securities regulators and two-thirds of shareholders. LSE and TMX submitted their application to Canada’s federal government on April 29. The country’s industry minister has 45 days, with a potential 30-day extension, to review the application to determine whether the transaction is a “net benefit” to the country.

The Maple bid wouldn’t require Industry Canada approval because it’s not a foreign transaction, though it would face reviews by regulators and Canada’s competition bureau, the group said in a May 16 presentation.

TMX also said today that Maple has provided “inadequate information” about its plans for TMX and that it carries the risk that regulators will reject integrating Alpha Group, a bank-owned trading system that competes with TMX, and CDS Inc., Canada’s clearinghouse for equities, into TMX.

--Editors: Chris Nagi, Steven Frank.

TO contact the reporters on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net; Matt Walcoff in Toronto at mwalcoff1@bloomberg.net.

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; Nick Baker at nbaker7@bloomberg.net.

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