Generally speaking, the best time to buy stocks is when they are out of fashion. And investors don’t seem to like them very much Alphabet (NASDAQ:GOOG) ahead of the company’s third-quarter earnings report.

The stock is trading at a price-to-earnings (P/E) ratio of 23 – below par S&P500 average. So it would be a good time for the company to remind shareholders of its strengths with a powerful update.

Background: AI spending

Alphabet is working demanding to build artificial investment (AI) capabilities into its Google search products. And although she has had some success in this area, it is a very exorbitant business.

As such, both CEO Sundar Pichai and CFO Ruth Porat warned of lower margins in the third quarter. The company is trying to reduce costs, but the effects are not perceptible yet.

This could mean that profits will be lower than in 2023 – even if revenues are higher. This is unlikely to cause the share price to rise from its current level.

However, I do not rule out a positive surprise. I think it’s safe and sound to say that the company’s stock currently reflects low expectations for the third quarter, so any unexpected news could be significant.

Google Cloud and YouTube

One place where a positive surprise may come from is the Google Cloud department. This part of the business is developing well – in the second quarter, revenues increased by 29% and profits by almost 200%.

However, it was different in the case of YouTube, where revenue growth was worse than the results of the entire company. However, the company still holds a leading position in the US streaming industry.

Both solutions could convincingly deliver powerful results and remind the market of Alphabet’s strength. However, it is worth noting that both of these products together generate less than 10% of total sales.

Neither will therefore offset the impact of higher costs in the core search business. But both can aid justify some of the significant investments a company is making.

Legal challenges

The biggest challenge Alphabet currently faces is regulation. In August, a US judge ruled that Google had acted illegally to maintain its monopoly status in the internet search industry.

Moreover, last month another trial began accusing the company of running an illegal monopoly. This time, the company’s advertising technology division is in the spotlight.

The company has a lot to lose as Google services generate 90% of total sales. However, the outcome is unclear and Alphabet cannot control it.

The only thing a company can do is continue its operations as best it can. And that’s exactly the evidence investors should look for in the upcoming report.

Investment uncertainty

Alphabet is currently facing a lot of uncertainty. Whether it’s the return on AI spending or the outcome of the latest court case, there are many things that are arduous to predict right now.

For a huge company, it’s basic to underestimate this potential risk, especially for stocks with a low P/E multiple. But I think there are better opportunities for me now.