It’s been a sobering few years for holders of Diageo (LSE:DGE) shares. Since revellers saw in the 2022 New Year — probably with a Diageo drink in hand — the stock has crashed 64%!
If some soothsayer had shown me a forward-looking share price chart back then, I would have assumed something ugly had happened. Perhaps some sort of accounting blunder. Or maybe that they were holding it upside down!
Then again, there has been no massive elevator-style drop over this time. The sort you would associate with an accounting scandal. It has just been a relentless drift lower, quarter after quarter, leaving the stock at a 14-year nadir.
The original catalyst for the sell-off was rising inflation and interest rates, which quickly put pressure on disposable incomes. This made it difficult for Diageo to match the impressive growth rates seen during the Covid spirits boom. US tariffs have recently added to its woes.
Looking forward though, there’s one key thing could help drive a big turnaround in the share price over the next five years.
The key US market
The US is the world’s largest spirits market, so it’s a crucial one for Diageo. In the first half of its 2026 fiscal year, net sales in North America fell 6.8%, driven by weak consumer confidence and brands like Don Julio, Casamigos and Crown Royal losing market share.
The tequila drop-off is quite worrying, with sales slumping 23% in the first half. Diageo paid a pretty penny for premium brands Don Julio and Casamigos, and they were growing strongly, with big ambitions to take them worldwide.
In recent months, however, a wave of lawsuits and independent lab tests targeted well-known tequilas, including Casamigos and Don Julio. The accusation is that these brands contain non-Agave sugars despite being labelled ‘100% Agave’ (the key ingredient in tequila).
While Diageo firmly denies this, it has damaged the brands’ reputation among tequila aficionados (there are YouTube videos on this controversy, if anyone’s interested).
At the very least, it suggests Diageo might have to lower prices to compete in what has become an ultra-competitive tequila market.
Timeless brands
For the stock to really recover then, Diageo will have to return to growth in North America. How likely is that?
Well, lower interest rates would help, as this could loosen consumers’ purse strings. Unfortunately, the war in Iran isn’t helping things here.
However, one area that could boost sales in the meantime is Diageo’s new focus on ready-to-drink (RTD) canned cocktails. If this successfully captures a younger Gen Z demographic, it could support a return to growth. The firm is significantly underrepresented in RTDs today.
Looking ahead this year, things look tough. But the trajectory for US interest rates is likely downwards over the next five years (barring another geopolitical disruption). And there’s a significant untapped opportunity with Guinness 0.0, as well as in RTDs.
Right now, Diageo is being held back by some weaker brands, tequila, and a product mix in transition. But I consider the core brands like Smirnoff, Johnnie Walker, Tanqueray, Baileys, and particularly Guinness to be timeless.
Under new management, I’m convinced a return to US growth is just a matter of time. And with the stock trading very cheaply and offering a decent dividend yield, I reckon it’s worth considering as a turnaround candidate.
