Why does the Diageo share price continue to fall?

The Diageo (LSE: DGE) share price is locked in a nasty downtrend at the moment. While the FTSE 100 is rising, it’s going in the opposite direction.

So what’s going on? And as an owner of the alcoholic beverages stock, should I buy, sell, or hold?

What’s going on with the share price?

In my view, there are several factors putting pressure on the share price at the moment.

One is the fact that growth has stalled due to a weak environment in the US (the company’s largest market). This financial year (ending 30 June 2024), analysts don’t expect any revenue growth from the company.

Another factor is uncertainty around GLP-1 weight loss drugs such as Wegovy and Ozempic. According to Goldman Sachs, the market for these drugs could be worth $130bn annually by 2030. Given that they can reduce the desire to consume alcohol, this could be a problem for Diageo.

A third issue is uncertainty over drinking habits in the future. Younger generations today are quite focused on their health. They also want to look good on social media. As a result, they’re drinking less than generations before them.

Finally, investors simply don’t have much confidence in management at the moment. After the group’s recent profit warning, investors are not fully behind newish CEO Debra Crew.

What I’m doing now

I’ve owned Diageo shares for quite a while.

I first started buying them in 2017 when they were around 2,000p. When they climbed above 4,000p in 2021, I took some profits off the table but held on to the bulk of my position.

As for my move now, I’m going to be holding (and perhaps buying).

Yes, there’s some uncertainty in relation to weight-loss drugs and younger generations’ drinking habits. These issues cloud the outlook for sales growth in the years ahead.

Yet I remain confident in the long-term story given the company’s powerful brands (Johnnie Walker, Tanqueray, Don Julio, Smirnoff, etc) and global reach. Over time, I think they should benefit from rising wealth in developing economies.

That said, I’m not expecting the stock to stage a dramatic rebound in the near term. Sentiment towards it is quite ugly at the moment. This is reflected in the downtrend.

For the shares to go up, Diageo needs to win back the confidence of investors and prove that the growth story is still intact.

The good news is that after the big share price fall, the stock is now looking quite cheap. Currently, the forward-looking price-to-earnings (P/E) ratio here is about 16.8. That strikes me as low for a company of Diageo’s pedigree. Given that earnings multiple, I don’t think the stock is likely to go much lower (assuming there are no more profit warnings).

So, for now, I’m just going to hold tight and be patient.

If the shares do keep falling, I’ll probably snap up a few more.