Dan Ives: China Tariff Truce Revitalizes Bull Case for Apple as Half of User Base Approaches Upgrade Cycle

Among the many tech companies that rely on Chinese manufacturing, none is better placed to benefit from the recent thaw in that country's tariff war with America than Apple (NASDAQ: AAPL). That, at least, is the view of closely followed tech industry analyst Dan Ives of Wedbush Securities.

In mid-May, the White House announced that it and China agreed to drastically reduce certain tariffs and pause others. Ives said in a subsequent interview with Bloomberg that this should lead to a "dream scenario" for the tech giant. Here's a look at why the analyst thinks Apple has such a monster opportunity, and whether the company can truly take advantage of it.

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The world's factory

It's telling that Apple emphasizes that the iPhone is designed in California. This might be something of a head fake to obscure the fact that the smartphones aren't made there. Rather, in the most likely case, your latest iPhone was made in China; estimates place the ratio at eight or nine out of every 10 of these products being produced in the massive Asian country.

Image source: Getty Images.

To put this in some perspective, Apple is hardly the only China-dependent large U.S. tech enterprise. Other notable techies getting many of their goods made there are sector mainstays Intel and Texas Instruments, to name two of many. Also China is a huge market for sales of their finished products.

Apple has a longer made-in-China history than many might realize. In those long-ago days before the iPhone came into being, Apple had been making its products in China in 2001. The lure of notably cheaper manufacturing was impossible to resist for the company, which was in the early stages of its vaunted Steve Jobs-led comeback around that time.

So any sanctions on Chinese manufacturing threaten to put a real hurt on its operations. After all, despite its efforts to crank services revenue higher, the great bulk of the company's top line still comes from device sales -- 72% of the total in the most recently reported quarter.

That's a high level of dependency, and I think investors worry about this. Even after Apple stock rallied when the pause was announced, its shares are still down more than 19% year to date in price -- comparing unfavorably with the 1% rise of the bellwether S&P 500 index.

Upgrading for fun and profit

They won't stay down at that level, Ives firmly believes. He's maintaining his outperform (i.e., buy) recommendation on Apple and his price target of $270 per share. That anticipates a rather chunky upside of more than 30%.

To him, the current stage of the tariff dispute provides the company with tantalizing options. One is to accelerate device-making in India, a more recent addition to its manufacturing base that came onstream in 2017.

This is a more expensive option by as much as 10%, according to recent reporting from Reuters, because of India's relatively high import duties on phone components. However it gives the company some leverage in its dealings with Beijing and can be a safety valve if the tariff war starts to heat up again.

If it doesn't, so much the better. Ives said that the company can easily maintain its "China-driven" manufacturing regime.

Either way, one of the stated goals of the Trump administration is to bring manufacturing back to the United States. In the analyst's view, that just isn't going to happen. The notably higher costs of making goods in this country would mean a price tag of $3,500 per iPhone.

So Apple's production strategy is not likely to stray from low-labor-cost countries. What's encouraging about this, according to Ives, is that it's stepping into a massive upgrade cycle. Over the next two to three years, he told Bloomberg, essentially half of Apple's installed base will buy the latest models. That should be quite the boon, as those models will remain inexpensive to make.

Pay attention to that services figure

The market's reaction to the big tariff news was muted, perhaps suggesting that many investors expected a cooling of the dispute. These folks also might not be buying Ives's assertion that the upgrade cycle will involve 50% of Apple users. Many skip several generations of iPhones before moving up to the latest models, myself included.

Still, I'd share the analyst's bullish view on the stock anyway, and I'm planning on holding on to my shares. For me, the great opportunity just now is not with phones, or even those slick recent iPad models or ultra-high-fidelity Beats headphones. Rather, it's the services offerings.

In the six months ending on March 29, Apple's revenue for such offerings climbed by 13% over the same period the previous year. Meanwhile, products revenue rose only 2%. I think this dynamic will continue, as the company can go in various directions with services to either widen existing revenue streams, such as from financing activities, or create new ones.

All that considered, I'd be in the Apple bullpen with Ives. I'm not totally sold on all of his analysis of the company's latest opportunities, but regardless I'd fully agree the stock is a buy.

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Eric Volkman has positions in Apple. The Motley Fool has positions in and recommends Apple, Intel, and Texas Instruments. The Motley Fool recommends the following options: short May 2025 $30 calls on Intel. The Motley Fool has a disclosure policy.