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Apple: Why Wall Street Got It So Wrong

Apple CEO Tim Cook
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Apple CEO Tim Cook

Not long ago, Apple was the darling of Wall Street. Now, it's hard to imagine the level of bullishness that had analysts formerly leapfrogging each other with lofty price forecasts for the tech giant's stock.

On Wednesday, more than a dozen firms, disappointed by Apple's growth prospects, pared back their expectations for Apple earnings and stock, which fell from $705.67 in September to as low as $385.10 last Friday.

UBS analyst Steven Milunovich cut his forecast for the stock to $500 from $560, and Credit Suisse trimmed its target to $525 from $600.

Apple has long been a street favorite but it was last spring, when the exuberance really began to ramp up. As Apple hit a $500 billion dollar market cap, analysts began ratcheting up their price targets to headline-making levels.

For instance, analysts at Topeka Capital Markets on April 2, 2012, initiated coverage on Apple with a buy rating and a price target of $1,001—just when the stock was breaching $600. Apple was trading just above $400 Wednesday.

The analysts wrote to their clients about the company's "unmatched aesthetics" and how it was "a brand that is able to touch the soul of consumers of all backgrounds."

(Read More: Apple's Dividend Doesn't Answer Questions About Cash Hoard)

A few months later, in September 2012, as Apple touched a record high of $705, the mean rating of the 54 analysts tracking the stock, according to FactSet, was a buy with a price target of $792.

Piper Jaffray analyst Gene Munster Wednesday trimmed his expectation for earnings, but said he believes the stock can trade higher in the second half of the year with the company looking at new product categories and product launches in the fall and next year. He also noted the $50 billion in share repurchases, announced along with a 15 percent dividend hike, was higher than expected. His price target is $688 and he rates the stock overweight.

Heading into Apple's latest earnings report, analysts still remained bullish with a mean buy rating, though their price target had come down to $532. On Wednesday, though, analysts, including those from Lazard, AllianceBernstein and UBS, reacted to that report by cutting their price targets still more.

"It looks like a herd of lemmings," says Roger Kay of Endpoint Technologies.

Of course, not every investor was bulled up on Apple. Jeffrey Gundlach of Double Line said that he was shorting Apple at $610, predicting that the stock would tank to $425.

"Once the bubble pops," Gundlach told CNBC, "it goes back down to the point at which it lifted off."

(Read More: Cramer: Apple Management Is in 'Complete Denial')

But the question remains: Why did so many analysts get it so wrong on Apple?

Kay chalks it up to two reasons. One, he tells CNBC, the Street didn't foresee the real threat of Google's ecosystem, which proved far more successful than many predicted. Google offered a product to an under-served market—consumers who couldn't afford the iPhone—which changed the market and put Apple in a poor position, he says.

Also, Kay argues, analysts have a challenging time calling turns in an investment. This is due to basic behavioral investing: Investors retain distinct biases. If an investment is performing very well then investors tend to assume it will continue to perform very well.

(Read More: Apple Not a 'Real' Tech Firm Anymore: Venture Capitalist)

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