Snap (NYSE:SNAP) stock experienced a 30% drop last week following disappointing 2024 guidance. The forecast for first-quarter sales hovering around $1.11 billion, represents a mere 13% growth, a stark contrast to the expectations set for rivals like Meta Platforms (NASDAQ:META), projecting a significantly higher growth trajectory. Analysts predict that the profits for the Santa Monica-based firm will only reach $205 million this year, a marked decrease from its peak in 2021.

The issue at the heart of the matter is Snapchat’s struggle with sustaining its user base, as potent competitors such as TikTok and Instagram continue to evolve the video-first landscape of social media. A recent study by Bernstein revealed that the average American now spends almost two-thirds of their social media time watching videos, a trend that has further jeopardized Snap’s grasp on the market.

This narrative is one that I identified and warned investors of back in 2020. Fast forward to the present, and Snap’s shares are now trading within a whisker of my original $10.50 forecast, validating my earlier cautionary stance.

SNAP Stock: Unveiling the Fundamental Analysis

Assessing Snap’s valuations involved a relatively uncomplicated process. By amalgamating Snapchat’s usage statistics from Sensor Tower with on-the-ground business observations, I discerned that the company was unlikely to surpass a compound 15% growth rate or exceed 20% EBIT (earnings before interest and taxes) margins through 2029. Such growth rates are rarely sustained by any company, and Snap seemed improbable to achieve such a feat. For instance, Google parent Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), only needed to maintain an annual growth rate of 16.6% over the last decade to reach $307 billion in revenues last year.

Utilizing a 2-stage discounted cash flow (DCF) model, projecting Snap’s revenues to reach $8.7 billion by 2029 with EBIT margins remaining at 20%, unveiled a fundamental value of approximately $15 billion for Snap, equivalent to $10.50 per share. This exposed a staggering 61% downside from its $27 share price at the time.

The Ascent and Descent of Snap

Reality, however, proved to be more intricate. In 2021, Snap witnessed an unprecedented surge in digital advertising, catalyzing a remarkable year of growth. According to the Interactive Advertising Bureau (IAB), digital ad spending escalated three times faster than the broader economy during this period, propelling Snap’s annual revenue growth to over 64%.

These new figures gave rise to a surge of bullish sentiment on Wall Street. This buoyancy pushed Snap’s stock price to $83, valuing the social media entity at a staggering $135 billion. However, sustaining this growth rate over the following five years and maintaining a growth rate of over 30% for the subsequent two decades without any decline in profitability, was imperative to justify its valuation. This scenario painted a picture of Snap generating $82 billion in revenues by 2029, almost ten times more than the original projected $8.7 billion.

Unfortunately, this fervor was short-lived. In 2023, Snap experienced a mere 12% growth in sales as advertisers moderated their spending. The projected 13% growth until 2024 indicates a continued descent for Snap.

Consequently, the fair value for Snap remains consistent at the initial $10.50 stipulated three years ago.

The Art of Prediction: A Reckoning

Nevertheless, the rollercoaster ride of Snap’s stock, from $27 to $83, and back to $11, vividly underscores the limitations of fundamental valuation. Even with a clear understanding of a company’s intrinsic value, predicting the trajectory of share prices presents an insurmountable uncertainty.

This predicament presents a unique challenge to short-sellers and options writers, where timing plays a pivotal role. If a position moves unfavorably, these contrarians often find themselves compelled to liquidate their holdings at a loss with no hope of recovering their principal. My initial recommendation of shorting Snap would have placed the short-seller in a dire position until the eventual slide in 2022.

In response to this issue, I’ve devised an AI-based stock-picking system that accounts for the momentum frequently observed in high-volatility stocks. According to the system, F-grade Snap shares are predicted to yield a mere 3.8% upside over the next six months, placing it in the bottom quintile of all tracked stocks. Subsequent downward earnings revisions and declining shares typically foreshadow future underperformance.

While it may be tempting for investors to consider purchasing Snap amidst the downturn, it is crucial to recognize that neither fundamental valuation nor technical factors support a rapid recovery.

On the date of publication, Thomas Yeung held a LONG position in GOOG and GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.