Why Apple's Valuation Is Irrelevant

| About: Apple Inc. (AAPL)

Trading at close to 10x forward earnings and a cash hoard that dwarfs many countries' annual gross domestic product, Apple (NASDAQ:AAPL) has been touted as ridiculously cheap. I'd argue that the tech giant is likely to stay cheap until we see some form of innovation from the company.

In the past, there's been speculation that Apple was working on a TV of sorts, then it was a smartwatch, now it's a mobile medical device. This device would generate warnings about impending heart attacks based on the sound of blood flowing through blood vessels.

Apple is said to already be working with audio engineers and looking into the use of optoelectronics to monitor the glucose levels in the blood. This comes after the company has already had talks with the Food and Drug Administration.

Apple has also been linked to the electric car maker Tesla (NASDAQ:TSLA). Analysts and many market participants viewed this as a possible area for future growth. Others, quickly ruling out a merger, still hope for some form of collaboration between the two companies.

Question is; will its latest medical device and potential to get in bed with one of the hottest EV companies go the way of Apple's other promising growth drivers?

What Apple must bring to the table in 2014

For Apple, it doesn't have to reinvent the wheel, but I do believe that investors are getting tiresome. Its built its name on product innovation. Without that, I can't see Apple making a meaningful break higher. While the market was somewhat receptive to the share buyback plan that billionaire Carl Icahn pushed for, the move since has been muted.

The upgrade of its product line, including the intro of the iPhone 5S and 5C, and iRadio were also welcomed, but these updates have come to be expected and are being baked into the stock.

1Q 2014 profit came in at $14.50 per share, compared to $13.81 per share for 1Q 2013. The company sold 51 million iPhones (47.8 million), 26 million iPads (22.9 million) and 4.8 million Macs (4.1 million), with the figures for the same quarter of the previous year in parentheses. At this point the quarterly earnings report is more a story of slowing topline growth and margin compression.

You've also got to worry about smartphone saturation in the more mature markets. Emerging markets will be key going forward. However, these market opportunities won't come without competition.

Apple remains in a lull somewhere between the sub-$400 price it hit in mid 2013 and the close to $700/share it made a push toward in 2012.

Facebook's (NASDAQ:FB) acquisition of WhatsApp is just another jab at Apple. While Facebook and Google (NASDAQ:GOOG) continue to spend money to grow their businesses, Apple remains steadfast on finding a way to grow organically, or at least investors are hoping they are developing something, anything.

Zuck hasn't missed a beat since taking his social network public, making a splash with the Instagram acquisition, and now spending $4 billion from the $11.4 billion in cash the company has for WhatsApp. To spend the same percentage of its cash hoard of $160 billion, Apple would have to spend some $60 billion.

Tim Cook and Apple have remained reluctant to "dilute" its brand with a major acquisition, believing that whatever it is developing in house will be sufficient to drive future growth. This has certainly been true in the past, but it remains to be seen if this is the right strategy moving forward. However, it is clear that beyond dividends and share buybacks, the company has to do something really aggressive to continue to create value for its shareholders.

In reality it's all about perception

Perception can often outweigh reality, especially in financial markets. There's likely some of that taking place with Apple, but, on the other hand, sometimes companies simply change, for the better or worse. There is the very real possibility that investors have mismanaged their expectations, refusing to believe that Apple has fundamentally shifted from the growth stage into the maturity stage. The refusal to accept this will likely put Apple into a sideways trading range, with investors refusing to jump in until a new growth catalysts is introduced, unbeknownst to them, it might never come.

This comes as Apple was a pioneer when they introduced the iPod and the iPhone, and even the iPad. However, its foray into wearables, or even the TV market, will likely not have the same market ratifying impact.

Even still, keeping some investors in the stock has been its "cheap" multiples, compared to other major tech stocks. Tech companies that are spending to grow, I might add. Dare I say it, but Apple could well be heading into a similar black hole that Microsoft has been sucked into for the past half decade.

Bottom line

While it's true that in the long-run, the market is a weighing machine. And while it's true that Apple has a ton of cash and a solid market share, in the near-term, the market is a voting machine. And I expect the votes to continue going against Apple. Even if Apple gets back to its five year average price to earnings multiple of 15x, we're only looking at 12% upside. I believe there are better ways to invest in the interim. If we think about it from an opportunity cost standpoint, I'd expect Lululemon (NASDAQ:LULU) to get a quick 16.5%, up to $60 a share, over the next year, while LinkedIn (NYSE:LNKD)could easily return nearly 20% to $250.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.