Intel (Nasdaq:INTC) still has a long road ahead of it to regain the love of tech investors who believe that the core PC market is in permanent decline and that rivals like Qualcomm (Nasdaq:QCOM) and ARM Holdings (Nasdaq:ARMH) are still too far ahead in the expanding mobile market.

The concerns about Intel – revenue growth potential, cost structure, capital spending needs – are valid, but should also be viewed in context. Even though Intel is currently converting revenue to free cash flow (FCF) at a historically poor rate, it's generating more than enough to pay its dividend and fund ongoing buybacks. I wonder, then, if investors should approach Intel from the viewpoint that the downside scenario sees Intel grinding along with a bond-like total return, but with the potential upside of a more equity-like return if the company's efforts in mobile and foundry pay off.

First Quarter Results Only Decent On A Relative Basis
I sometimes wonder if investors get so obsessed with a company's performance vis a vis sell-side analysts that they sometimes forget to step back and look at results on their own merits. To that end, while Intel did meet the sell-side targets for top and bottom-line performance, the results really weren't what I'd call good.

Revenue fell almost 3% from the year-ago level and nearly 7% from the fourth quarter. Performance was pretty much evenly bad across the board, as all the major units had mid-to-high single-digit revenue declines on a sequential basis. That said, relative to the overall PC market, Intel's PC chip business did appear to outperform.

Margins were not particularly good. Gross margin fell almost eight points from the year-ago level and two points from the prior quarter, as inventory write-offs and lower utilization hurt. Operating income fell by nearly one-third, and the nearly 10-point drop in operating margin (three and a half points, sequentially) was one point steeper than expected. While Intel only missed its average EPS estimate by one cent, that was due to a lower-than-expected tax rate.

SEE: How To Decode A Company’s Earnings Reports

Plenty Of Challenges Left In Mobile
Clearly the biggest talking point on Intel remains its ability (or inability) to transition from dominating the PC chip space to becoming a major player in the mobile market. Some argue that it's just a matter of time, that Intel was slow to recognize the transition, but that the company's R&D and manufacturing capabilities will eventually close the gap with the likes of Qualcomm, Broadcom (Nasdaq:BRCM), and ARM's licensed technology.

Maybe that's true. Certainly Intel has a manufacturing advantage that its most direct mobile rivals (other than Samsung) do not. But I wouldn't underestimate the challenges. Intel has been flummoxed in trying to match ARM's power efficiency, though recent Intel chips have been better. I also wouldn't underestimate the reticence that some mobile players may have about letting Intel back into the game – everybody saw how Intel and Microsoft (Nasdaq:MSFT) dominated the PC market, and I don't think Samsung, Apple (Nasdaq:AAPL), LG, and the others want a replay (though you could argue ARM's design market share is just old wine in a new bottle).

Adapt Or Die
Barring a major leap forward that puts Qualcomm and/or ARM on its heels, Intel has to accept that the road forward is quite a bit different than the one that brought it here. As chip companies go, Intel hasn't been all that great recently at generating cash flow, and I'm not sure the Street is sold on the company's foundry aspirations (though I view it more as a means of subsidizing the cost of staying on the bleeding edge of manufacturing capabilities). At a minimum, investors should expect a steady drumbeat of criticism and heckling regarding the company's cost structure unless/until the mobile market share improves.

SEE: A Primer On Investing In The Tech Industry

The Bottom Line
Intel is in a tricky spot from a valuation perspective. Free cash flow margin is quite low now, and if the company cannot improve it beyond the mid-teens it's hard to argue that the stock is really exciting from a capital gains perspective. Even an eventual return back to the 10-year average free cash flow margin of 20% only suggests a fair value in the neighborhood of $25 unless the company can reignite revenue growth.

Here's how I view Intel today – it's a hybrid bond with stock-like upside. If Intel “is what it is”, I think the company will continue to generate significant cash flow and pay a hefty dividend. To me, that suggests a bond-like downside. If, however, the company can reignite growth through a stronger push into mobile (and/or more success in the data center), that bond-like floor will also see a meaningful capital appreciation kicker that should result in appealing total returns.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.