Apple's earnings: The Street's big miss

The professional analysts were bested -- once again -- by the bloggers

[Originally posted Jan. 29, 2010, on Fortune.com]

There's a good reason most Wall Street analysts don't publicly review their predictions after the fact. It's called self-preservation. Who wants to advertise how badly they misunderstood the companies they follow?

Case in point: Apple (AAPL), and the quarterly report it issued Monday afternoon. Apple management gave ample warning that it wanted to change its accounting procedures under the rules revised last fall -- recognizing iPhone revenue when it comes in, rather than spreading it out over 24 months (see The day Apple released its revenue bomb).

Yet nearly half the professional analysts we polled missed the boat entirely -- never bothering to publish estimates for the so-called non-GAAP (generally accepted accounting principles) numbers that pushed Apple's revenue to a record $15.68 billion in its first fiscal quarter of 2010.

And those who did were all over the lot, getting as many calls wrong as they got right. None of the professionals hit as close to the mark as our three favorite independent analysts: Turley Muller, Andy Zaky and the blogger who calls himself deagol.

Let's look at the numbers:

This quarter's chart is simpler than usual because the GAAP numbers -- the ones most Wall Street analysts focused on -- are no longer relevant. Without those, several analysts had nothing to show; they fell off the chart entirely. Even then, there are an awful lot of blanks in the grid below.

The best estimates are highlighted in green, the next two runners up in light green. The worst guesses are highlighted in blood red; the second and third worst in pink. Source: Apple 2.0

Adopting Stephen Colbert's system for handing out bouquets and brickbacks, we give a tip of the hat to:

• Muller, with one green, two light greens and not a trace of pink
• Zaky and Reiner, with one solid green and one light green each
• Abramsky, with one sold green and no pink
• Gardner, deagol and Moskowitz, with one light green apiece and no reds or pinks

And a wag of the finger to:

• McCourt with one red and one pink
• Dede, with one red and no green
• Reitzes, Shope, Misek with one pink each

Finally, special mention for the analysts who were over the lot:

• Marshall, who guessed high across the board and scored one green, one red and one pink
• Rakesh, who scored one solid green and one pink
• Huberty, who scored the most reds (two) but also one solid green
• Craig, Fidacaro and Chokshi, who turned in a rainbow of reds and greens and pinks.

Turley Muller, who writes a blog called Financial Alchemist, led the pack for the fifth quarter in a row. His estimates this quarter were off, on average, by less than 2% -- a shade better than the other unaffiliated analysts, who as a group missed by an average of 2.5%.

The professionals, by contrast, missed by 6.9%. The best estimates came from BMO's Ken Bachman (off by 2.8%), Thomas Weisel's Doug Reid (3.5%) and Oppenheimer's Yair Reiner (3.6%). The worst came from Broadpoint Tech's Brian Marshall (off by 11.2%), Morgan Keegan's Travis McCourt (10.2%) and Morgan Stanley's Katy Huberty (10.1%).

To be fair, the professionals cover whole sectors, not just Apple, while the independents are free to concentrate on the peculiar complexities of Cupertino's balance sheet. With that balance sheet streamlined and simplified by the accounting change, perhaps the pros will do better next time.

See also:

• Apple's record earnings, Wall Street's double whammy
• Apple earnings: How the analysts got it so wrong
• Apple's 2009 Q3: Analyzing the analysts
• Apple's 2009 Q2: Analyzing the analysts
• Apple's 2009 Q1: Analyzing the analysts
• Apple's 2008 Q4: Analyzing the analysts

[Follow Philip Elmer-DeWitt on Twitter @philiped]