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

BALTIMORE (Stockpickr) -- Have you heard the latest updates about the upcoming Apple (AAPL) iWatch? Some sources are reporting that the hotly awaited wearable device will begin production in a Taiwanese factory in July. That's just weeks away!

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But I'm not here to talk about the iWatch today. Apple hasn't even announced the thing yet, and I don't know any more about it than you do. More important, the existence of an iWatch doesn't change the key takeaway in Apple's stock right now: It still makes a lot of sense to be a buyer here.

That's because Apple's "next big thing" is hidden in plain sight. And it could be the most important catalyst that no one is talking about right now.

The Missing Hype Over Continuity

At the Apple Wordwide Developers Conference keynote on June 2, execs introduced Continuity, a set of features that will flow the user experience among a single customer's Apple devices, letting a user start writing an email on your iPhone, for instance, and finish it up on your Mac.

Continuity has lacked a lot of hype because it's simply a logical next step for the firm's Mac OS X and iOS operating systems. Devices already talk to one another to some extent right now, and Continuity's features (such as Handoff, shared calling and Instant Hotspot) merely make the process more seamless than ever before.

But the new features do speak to a bigger driver of sales growth for Apple in the years to come.

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Ever since iOS was released, Apple-watchers noted the gradual shift in Mac OS X toward the simpler mobile operating system. Everyone believed Apple was planning on merging the two platforms into a single one-size-fits-all OS. But the introduction of Continuity this month confirms that hasn't been happening at all.

At the end of the day, a desktop computer performs certain tasks better than a tablet or phone and vice versa. That's not exactly a shocking revelation. Likewise, amalgamating Apple's product families into a single lowest-common-denominator offering doesn't exactly make much business sense for a firm such as Apple that can sell multiple devices to customers.

Instead, the point of Continuity is to make those multiple devices work together well.

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.

Looking at the chart, Apple is a "buy the dips" stock from a long-term perspective.

Apple's downtrend broke back in the second quarter of 2014, and since then, shares have been bouncing their way higher in a well-defined uptrending channel. Put simply, every test of trend line support on the way up has been a low-risk opportunity to get into AAPL. The uptrend in relative strength confirms that Apple isn't just trending higher -- it's also outperforming the S&P 500 in good times and bad ones. While shares are sitting near the top of their price range this month, the next dip in AAPL is a good place to be a buyer.

Data from EidoSearch adds some very attractive statistical flavor to the mix as well. Based on historical market performance going back to 1980 that's similar to Apple's recent price action, the average return for Apple's current setup is 28.2% over the next year -- and the odds of a net gain in the next 12 months were statistically significant.

So while the news cycle continues to revolve around the iWatch, you can rest easy. Apple's "next big thing" is already on the firm's release calendar -- and shares look likely to benefit in the near-term.

-- Written by Jonas Elmerraji in Baltimore.


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At the time of publication, author was long AAPL. Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji

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