Only two other FTSE 100 stocks have dropped by as much as Diageo (LSE: DGE) in the last three years. The drinks giant’s 57% fall has meant an over £40bn loss in its market cap. It’s odd to see such a crisis for a company whose products are still selling like hot cakes. I see Guinness absolutely everywhere whenever I step out for an evening of frivolities.
I was wondering if the powers of probabilistic text generators might have some insight on the subject. In particular, whether artificial intelligence could shed any light on the decline, fall and possible recovery. I asked ChatGPT: ”When will Diageo recover from its 57% fall?” And here’s what it told me.
Changes
The road to recovery for Diageo shares is, in ChatGPT’s estimation, a four-pronged approach. The new changes to management are what I believe are worth paying attention to. Many a company has thrived after getting the right person at the wheel.
Its other points were less impressive, in my view. It talked about its attractive valuation. The strength of its brands like Guinness and Tanqueray was another consideration. It also talked about a vague “market stabilisation” too. But none of this is the keen insight I was hoping for.
Among its entire 1,500-word response, the most striking detail was what it left out. The rather large issue that is dominating any discussion of alcoholic drinks in recent years. Namely, that folks are drinking less.
Coming years
The impact of changing consumers’ habits on Diageo is stark. The firm had long traded at a premium to the rest of the FTSE 100, a price-to-earnings ratio of 25 or more being common for years. The price-to-earnings (P/E) ratio today is just 13. That’s a strong signal that the longer-term outlook is less rosy.
This omission is another example of some of the faults of ChatGPT and the like. It’s enough for me to cast doubt on how ‘intelligent’ this technology really is. It’s also why we shouldn’t be relying on AI to make important life decisions like investing.
My own view is that Diageo is a well-run company facing tough market conditions. We’re still in the early part of the process, but recent disappointing first-quarter sales is not a good omen. That might be an early warning sign that the stock is going to suffer as people choose to drink less.
The firm is bringing in ex-Tesco boss Dave Lewis (sometimes referred to as ‘drastic Dave’) to make the changes the company may need. As mentioned, a change in management can often be what a company needs to get back on the right track.
I’d not be surprised to see a turnaround in the coming years. For this reason, I think an investor may wish to think about buying the stock. That said, it could get worse before it gets better.
