If management's predictions for the next quarter hold up, it looks as though the semiconductor sector might have seen its bottom for this cycle. Or so the information coming out of TaiwanSemiconductor (NYSE:TSM), the largest contract manufacturer of semiconductors, would suggest.

Second-quarter results aren't going to capture the attention of those who don't follow the sector, but that's OK. Revenue was down 10% and net income dropped nearly 22%, but both performances were still better than estimates. What's more, they were also better on a sequential basis, and that might be the key for those trying to pinpoint the bottom of the semiconductor cycle.

While wafer shipments dropped about 1% from the year-ago level, they were up 14.5% from the prior quarter. The company saw a slightly lower percentage of revenue coming from the highest-end technology, but overall, the trend is still moving toward the small technology. Looking at the applications of the chips, we see that communications continues to slide while computer chips themselves continue to recover.

Guidance for the next quarter was also fairly encouraging. Management believes that shipments will grow by a mid-single-digit rate and that utilization will exceed 90%. That's an improvement from the 85% utilization in the second quarter, and 90% is often seen as the break point for a growing/improving market.

Fools considering an investment here need to be realistic about the semiconductor cycle and the nature of the business. While every top of the cycle seems to carry with it the promise that "it's different this time," it never is. And booms are inevitably followed by busts. So this is not a stock for investors who can't stomach peaks and valleys.

Fools also need to be aware of the realities of Taiwan Semiconductor's business model. Specifically, the company will pretty much always need to invest substantial amounts of money in new capital equipment. For however much customers may like the folks at Taiwan Semiconductor, if the company doesn't stay at the cutting edge of technological capability, they will lose business to other fabs that do.

I like this stock as a play on the eventual recovery of the semiconductor market. I don't know when the market for semiconductors will get back to solid growth, but I'm confident it will happen someday -- and Taiwan Semiconductor will be there to go along for the ride. Valuation on these shares has already started to move in anticipation of a recovery, but there should still plenty of room to move further. What's more, with a dividend yield of better than 3.5%, investors can get paid while they wait.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).