the bull and bear case for aapl

here's what some bears on aapl are saying:

peaked margins - their gross margin reached 36.9% in 6/07 and has since declined to 34.7% in 12/08. this trend should continue as pricing pressure will intensify going forward as the company aims to maintain its market share in a declining economic environment. asp's will simply decrease faster than cost of goods sold, thus negatively impacting the gross margin.

the iphone will cannibalize the ipod family - the iphone has successfully integrated the functionality of an ipod into a sleek smartphone and has effectively rendered a significant portion of the ipod product family obsolete. ever since the 6/07 introduction of the iphone, there has been a marked deceleration of unit sales of ipods on a year over year basis. this presents a serious problem, as ipods generated 28% of Apple’s total revenue in fy 08.

the stratospheric carrier subsidies are unsustainable - it is estimated that aapl receives approximately $450 from at and t wireless on the activation of an iphone 3GS as part of a carrier subsidy program. it is also estimated that aapl receives an average subsidy of ~$300 from its international carrier partners as well. these subsidies are well above average of what other vendors (even rimm) collect. after the introduction buzz of the iphone 3gs has worn off and the subsidy agreements expire, the wholesale asp of the iphone will likely take a significant step down.

here's what the bulls are saying:

the iphone ramp is in the early innings - with the iphone now available in 80+ countries (in-line with 81 in 3/09, 70 in 12/08, 51 in 9/08 and 6 in 6/08, the global ramp has just begun (recall rimm has over 400 carriers now). cumulative shipments of the iphone since its 6/07 inception now total 26.4 million units. (note: jobs on wednesday put iphone sales at 30 million).

they are the best positioned company in the technology sector - aapl continues to gain share across its major product lines (macbook notebooks, mac desktops, ipod digital music players, iphone smartphone and the itunes application). its business model is becoming stronger over time as well with continued penetration of international markets (the opposite of most of its competitors).

the bank of aapl - aapl generated $2.3bil in cash flow from operations in the 6/09 quarter and its cash hoard now stands at $31.1bil (or $34 per share) – the single largest in the technology industry. Only csco has a comparable cash balance to aapl when analyzing the leading technology companies' balance sheets. with aapl shares currently trading at ~$171, the cash balance represents ~20% of the market capitalization.

i've made no secret of where i come down in this debate. i think aapl is the undisputed growth name in tech, and i expect it to trade to about $200 by the end of 2009.