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Forget the iWatch: Apple's Next Big Thing Is Hidden in Plain Sight

Stocks in this article: AAPL

By incentivizing its niche of spend-happy consumers to stay within the Apple ecosystem, Apple becomes one of the few device makers with a truly deep moat. Think about that for a moment. Switching to Android becomes a much less appealing proposition if you lose major functionality with your laptop and tablet -- and who knows which other devices in the future. That's the direction Apple is moving in. In fact, it's the direction that Apple has always been moving in.

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And by controlling every piece of the equation (both hardware and software for phones, PCs and tablets), Apple is uniquely able to deliver a customer experience that's greater than the sum of those parts.

So no, you don't need to speculate about the next product in Apple's lineup, because one of the most significant developments is already being paraded in front of us. Continuity might not get the same attention as an iWatch or iToasterOven, but it and its sister technologies are likely to contribute to the sales of Apple's "next big thing" far more than analysts are giving credit for.

Valuing Today's Apple, Not Tomorrow's Apple

I mentioned earlier that, iWatch or not, the conclusion for investors should be the same: to buy shares of Apple in 2014.

There's no escaping the fact that Apple is a company that drums up emotion in investors -- positive and negative alike. And it's easy to get lured into the trap of speculating about how many iWatch units the firm will need to sell to crack the $100 per share mark. But no one stops to question whether that sort of projection is even necessary in the first place.

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Frankly, at Apple's current valuation, the firm doesn't even need a new "next big thing" to look cheap from a fundamental standpoint. As I write, Apple sports an ex-cash P/E ratio of just under 12. And that $133.6 billion net cash and investment position? It's enough to pay for a nearly one quarter of Apple's $548 billion market capitalization today. Plus, Apple announced back in April that it plans to deploy that mountain of dry powder to return capital to shareholders at an unprecedented rate: The firm's planned $130 billion payout by 2015 is the largest combined share buyback and dividend effort in history.

Recall that we're talking about a firm that collects approximately 87% of all smartphone segment profits. For comparison's sake, investors are putting a higher earnings multiple on shares of Wal-Mart (WMT) right now (15.7 times earnings); investors collectively think that WMT is more likely to deliver meaningful growth in its $476 billion in annual revenue than Apple can in its $171 billion in annual sales. U.S. tobacco giant Altria Group (MO) sports a richer valuation than Apple right now too (at nearly 20 times earnings), and its customer base is dying. (Literally.)

So while there's no question that Apple's scale is utterly mammoth right now, there should be little question that this stock is still cheap by any conventional valuation metrics, even if we only assume tepid growth going forward.

Just over a year ago, shares of Apple faced some real challenges to upward mobility. The stock was over-owned, and the technicals were abysmal. But that's changed completely today. According to Morgan Stanley, institutional ownership of Apple's stock has reached a five-year low. Apple is the only large-cap technology company whose current exposure in professional portfolios is less than its weight in the S&P 500.

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Likewise, the recent stock split adds some structural support to buyers in 2014. Momentum is clearly bullish as we head into the summer.

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