Diageo (DEO), the global spirits giant behind brands like Johnnie Walker, Guinness, and Tanqueray, has been struggling to keep up with the market. Compounding the challenges, Diageo's stagnant sales growth over the past three years raises serious concerns.

Additionally, the company has declining earnings estimates over the last year, indicating continued bearishness from analysts and giving it a Zacks Rank #5 (Strong Sell) rating. DEO stock has significantly underperformed both its industry peers and the broader market, raising alarms about its near-term prospects.

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Diageo Sales Stall and Earnings Estimates Fall

Diageo’s revenue growth has remained sluggish over the past few years, struggling to gain momentum. As shown in the revenue chart, sales have hovered within a narrow range, with no significant growth since 2021. This stagnation is concerning, particularly for a company that relies on premium branding and global expansion to drive revenue.

The weak top-line performance is now reflected in Diageo’s earnings outlook. Analysts have unanimously lowered earnings expectations for both this year and next year. Estimates for this year decreased by 4.2% and 3.5% the next year.

With falling earnings estimates and a stock price that continues to underperform, Diageo appears to be facing structural challenges that are likely to limit its upside potential in the near term.

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Diageo Fights Demographic Shifts

One of the biggest headwinds facing Diageo is the changing drinking habits of younger consumers. Simply put, young people are drinking less than previous generations, posing a long-term challenge for alcohol producers.

A 2023 Gallup survey highlights this shift, showing that the percentage of adults under 35 who say they drink alcohol has declined from 72% in 2001-2003 to just 62% in 2021-2023. This drop reflects broader lifestyle changes, with younger generations placing a higher emphasis on health and wellness, as well as a greater willingness to experiment with alcohol-free alternatives.

Should Investors Avoid DEO Stock?

With stagnant sales growth, declining earnings estimates, and shifting consumer trends working against it, Diageo faces significant challenges in the near term. The company’s premium branding has historically been a strength, but younger consumers’ changing drinking habits and increased competition from non-alcoholic alternatives could weigh on long-term growth.

Until Diageo can reignite sales growth or show a reversal in earnings trends, investors may want to steer clear of DEO stock and look for stronger opportunities elsewhere.

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