Taiwan Semiconductor Manufacturing (TSM 5.08%), better known as TSMC, delivered strong earnings in its second-quarter report released last week. Slowing consumer spending and the cyclical nature of the semiconductor industry led to fears that demand would slow for the Taiwan-based chip manufacturer.

While the company pointed to some areas of slowing activity, the fears appear overblown, indicating that investors might want to consider TSMC stock amid this uncertainty.

TSMC Q2 earnings saw surging revenue

In an environment of inflation and recession concerns, investors fear the bearishness will take the chip sector from its massive shortage into a possible surplus. Admittedly, cyclicality has defined the chip sector for decades, and with new capacity coming on line, the shortage appears to have become less severe in recent months.

Nonetheless, you might not see much of a slowdown judging from TSMC's second-quarter earnings report. In the first six months of 2022, revenue of almost $36 billion increased 40% compared with the first two quarters of 2021. This points to some recovery as second-quarter revenue surged by 44% year over year, and revenue for 2021 climbed by only 19% versus 2020 levels.

During the first two quarters of the year, net income came in at more than $15 billion, 61% higher than during the same time frame in 2021. Profits increased as TSMC held down the growth in the cost of revenue and operating expenses.

Fears about the chip market

Indeed, the market will probably see some slowing. Both TSMC and its peers have ramped up construction on additional fabrication facilities. In 2021, TSMC pledged to spend $100 billion in fab construction over the next three years.

Also, recessions can slow segments of its market, such as PCs and smartphones, and TSMC confirmed that trend on the second-quarter earnings call.

That could explain why analysts forecast 32% revenue growth in 2022 and 9% next year. Also, supply chain challenges continue to delay deliveries. While TSMC has not cut construction spending and reiterated its compound annual revenue growth forecast of between 15% and 20% over the "next several years," the inability to get supplies quickly has pushed some capex spending into 2023.

The state of the chip market

Despite the slowing growth, no market signals point to the oversupply of chips that often characterizes downturns in the chip market. TSMC also benefits from competitive advantages that will minimize the effects of a potential industry downturn.

One advantage is its position in the foundry industry. TSMC derives 51% of its revenue from the 5nm and 7nm nodes, the smallest, fastest chips produced at this time. Currently, TSMC and Samsung are the only foundries that can make such chips, though Intel has invested heavily in an attempt to catch up technologically.

Moreover, sectors such as the Internet of Things, data centers, and automotive will probably not see much slowing due to secular growth trends or severe shortages. In the automotive segment, General Motors CEO Mary Barra confirmed this point in a CNBC interview when she said the automotive chip shortage will persist into 2023.

Also, given the behavior of TSMC and other stocks, the market appears to have factored in this trend. Share prices have fallen by more than 40% since peaking in January. This has taken the company's price-to-earnings ratio to 19. In comparison, two of its largest clients, Apple and Advanced Micro Devices, sell for 24 times and 30 times earnings, respectively.

Consider buying TSMC stock

Like its peers, TSMC is not immune to supply chain and economic challenges. But its stock appears oversold, considering that the fears about the industry seem overblown at best.

Admittedly, markets such as PCs and smartphones could see lower demand for a time. However, TSMC holds a technical lead with 5nm and 7nm chips, and many subsectors show no signs of slowing. At less than 20 times earnings, investors appear to have an excellent opportunity to add shares in this semiconductor stock at a discount.