The chip industry has its ups and downs, which is why it's not uncommon for these companies to go through rounds of hiring and layoffs. However, when one company hires workers while others are cutting back, you must pay attention. One of two things could be happening. First, it could be a terrible management decision. Second, it could be fantastic if the company had insight into trends just on the horizon.

Taiwan Semiconductor (TSM -0.81%) made a move like that earlier in March, announcing it plans to hire 6,000 employees despite a downturn in the chip market. So is this a smart move or a huge mistake? Let's dig in and find out.

Taiwan Semiconductor hires while competitor cuts pay

Taiwan Semiconductor is one of the world's largest chipmakers, but it doesn't sell its products directly to consumers. Instead, it contracts out to companies like Apple, Nvidia, and AMD to make their chips for them. Because of this arrangement, management likely makes many hiring decisions based on the orders placed by its large client list.

These customers are knowledgeable about consumer demand, so I think trusting management to hire these workers is the right call.

But it also comes with the backdrop of Intel, another chip giant, cutting wages, benefits, and bonuses. While these Intel employees likely won't jump ship to Taiwan Semiconductor (these jobs are specifically in Taiwan), these actions show Taiwan Semiconductor is in better shape than Intel. As Taiwan Semiconductor's $40 billion Arizona plant is under construction, it may cause some U.S. Intel employees to consider joining Taiwan Semiconductor instead.

This action also brings to mind a Warren Buffett quote: "Be fearful when others are greedy and greedy when others are fearful." As many chipmakers become fearful of the current cycle, Taiwan Semiconductor is investing in the future, as they know it will eventually end. And with Taiwan Semiconductor's best-in-class technology -- specifically its 3 nm and 5 nm (nanometer) chips -- it understands those chips will still be in great demand when the cycle swings in its favor.

Despite this, Taiwan Semiconductor's stock isn't valued very highly.

Taiwan Semiconductor stock isn't overvalued

Using trailing earnings when assessing how expensive a stock is in a cyclical industry is a mistake. This metric will look artificially low because the market is already pricing in a downturn in earnings. However, when you compare its forward price-to-earnings (P/E) ratio (which utilizes earnings projections) with its historical trailing earnings, you can better understand if the stock is over or undervalued.

TSM PE Ratio Chart.

TSM PE Ratio data by YCharts.

Considering Taiwan Semiconductor's average P/E ratio for a decade was 19.2, and its forward ratio is 15.6, I'd say the stock is still reasonably valued.

The stock may see some pressure this year, as Wall Street analysts expect revenue to shrink by 1%. However, that same group believes Taiwan Semiconductor can grow sales by 22%, producing $7.03 in earnings per share (EPS) in 2024. Compared to the $6.60 Taiwan Semiconductor produced throughout 2022, it would still mark strong earnings growth in 2024.

While waiting for that recovery, you can enjoy Taiwan Semiconductor's generous 2% dividend yield.

I believe management is making a wise decision to add these additional workers in 2023. While you may not see it pay off in the short run, this choice could boost Taiwan Semiconductor over the next few years. Moreover, with its stock at a reasonable valuation, I think investors can confidently take a position in Taiwan Semiconductor.