Unfortunately, ASML (NASDAQ: ASML) hasn’t served as a great investment over the past three years. Over that time, the stock has provided investors a total return of -6%. The recent 22% drop in the company’s stock price from Oct. 14 to Oct. 16 greatly contributed to the company’s weak medium-term returns.

However, this company still remains one of the dominant players in the semiconductor industry. Here, I’ll provide a detailed view of what exactly ASML does, what caused the massive drop in the stock price, and whether now is a time to buy the dip on this stock.

ASML: An Essential Equipment Provider in the Semiconductor Industry

ASML is a semiconductor equipment company. It provides a specific type of equipment to semiconductor manufacturers: lithography machines. Lithography essentially creates a blueprint on silicon wafers for the integrated circuit that manufacturers will put onto the wafer. Then, a process called etching removes the parts of the wafer not outlined by the blueprint.

This transforms the blueprint into a physical pattern on the wafer. Etching is a separate step that requires different equipment, which ASML does not make. Examples of companies that provide etching equipment include Lam Research (NASDAQ: LRCX) and Applied Materials (NASDAQ: AMAT). After etching, manufacturers must complete further processes to create the final semiconductor product.

The company’s most recent earnings report posted better-than-expected results on revenue and earnings per share (EPS) for the quarter. However, the company’s guidance outlook was weak, which was the source of its dramatically falling stock price afterward. They expect revenue to be between 30 and 40 billion euros, representing a 7% decrease at the midpoint compared to its previous estimate. Additionally, the company’s bookings of $2.8 billion for the quarter, a measure of future potential revenue, came in around 53% lower than the $5.9 billion expected.

ASML Is Being Wounded by Non-AI Parts of the Industry

ASML is somewhat at the mercy of chipmakers as a semiconductor equipment provider. The company can earn revenue from three main sources: new fabrication sites being built, new equipment needed due to wear and tear or tech upgrades, and servicing its existing, installed equipment.

The company's CEO, Christophe Fouquet, says demand for AI chips is robust. However, other parts of the semiconductor industry are still recovering. In this case, manufacturers tend to delay their new equipment purchases until they see more signs of demand strengthening. These firms would rather use their existing equipment. Weak demand forces them to compete more on price. Investing in new equipment now would hurt revenue or profits. They would have to raise prices or cut margins.

Recent news shows hesitation among chip makers. Samsung (OTCMKTS: SSNLF) is delaying the delivery of ASML equipment at its new facility in Texas. This comes as Samsung “has yet to win any major customers for the project." It was to take delivery of ASML’s extreme ultraviolet (EUV) lithography machines. They are essential for making the advanced chips that the facility will produce.

Overall, playing ASML on a short-term basis is difficult. Projecting when other parts of the semiconductor industry will take off feels like anyone’s guess. In a recent interview with Bloomberg, the host asked the ASML CEO if a full recovery in other parts of the market shouldn’t be expected until 2026. Fouquet said, “When do they start to push the accelerator again? We don’t know." He remarked that it takes time for companies to move from cautiousness to a more long-term path to growth.

ASML Maintains a Dominate Position, and Its Relative Valuation Has Fallen Substantially

This year, ASML stock has experienced a large decrease in its forward price-to-earnings (P/E) ratio. The ratio has declined 20% from the end of the year, down to 28.3x. This signals that the market sees ASML’s future earnings as more risky. Still, it could also indicate that temporary factors causing this decline might undervalue the stock if the business remains as fundamentally strong as it was at the beginning of the year. Its forward P/E ratio now sits below its 10-year median, signaling a potential entry point.

The company may face short-term troubles, but it has a near monopoly in much of the lithography market. Given the difficulty in forecasting a recovery in other parts of the semiconductor industry and the firm's valuation below its historical midpoint, this is a decent opportunity to get into a big-name stock.