In the realm of semiconductor stocks, investors often overlook ASML (ASML 1.14%). However, as the manufacturer of the machines that make the most cutting-edge chips, it plays an essential role in the advancement of today's chip technology.

Like other tech stocks, ASML fell into bear market territory in 2022. But ASML has since surged 21% higher in 2023. Now investors will have to decide whether to buy into the rally. Let's take a closer look at how to approach ASML stock moving forward.

Understanding ASML's advantages

For some investors, ASML may be the most essential company they do not know. It is the only maker of extreme ultraviolet lithography (EUV) machines, which help manufacture the most advanced semiconductors in the world. Companies that use ASML's EUV tech include Taiwan Semiconductor, Samsung, and Intel, which hopes to foster its comeback on the backs of these machines.

ASML also produces deep ultraviolet lithography machines (DUV), a technology to manufacture larger chips. Here, it faces competition from Lam Research and others.

But with heightened geopolitical tensions, governments have become increasingly concerned that roughly two-thirds of the world's third-party production capacity is in Taiwan. This has led the U.S. and E.U. to subsidize the construction of foundries on their home soil. Since much of this will involve the most advanced technology, it means more demand for ASML machines.

Geopolitics also drives other aspects of this business. ASML is under tremendous pressure from Western governments not to sell the most advanced technology to China. However, it does sell some older DUV technology to China. This makes up a portion of ASML's backlog, which now stands at over 40 billion euros ($44 billion).

Breaking down ASML's financials

Investors should also note that ASML's clients spend heavily on maintenance. In 2022, the company derived 27% of its revenue from service and field option sales.

Such services boost net sales, which came in at more than 21 billion euros ($23 billion) in 2022. They rose 14% from 12 months ago on the expectation of a chip industry rebound in the second half of 2023.

Nonetheless, costs and expenses have risen faster than sales, causing its net income of 5.6 billion euros ($6.1 billion) to drop by over 4%. Amid anticipated demand increases, ASML has made investments to increase capacity and research the technology for the next iteration of its EUV machines. Hence, the drop in income should arguably not concern investors significantly.

Moreover, with the 25% gain in 2023, ASML reversed the stock losses over the last year with a modest increase. This should hearten its investors, who have seen other chip stocks lose more than half of their value over the same period. But at a price-to-earnings (P/E) ratio of 45, it is considerably more expensive than Lam Research, which sells for 13 times its earnings. The question for investors is whether ASML's technical lead is worth the added expense.

Should I buy ASML stock?

Despite a pricey multiple, ASML looks like a no-brainer semiconductor stock worth consideration. ASML is arguably the most important company in the advancement of today's chipmaking technology. Given the increasing need to power AI, virtual reality, the Internet of Things, and other technologies, demand for ASML machines will likely rise significantly over the next few years. This should mean that the company's spending to expand capacity and widen its technical lead will pay off for its investors long term.