Seemingly no growth story can go on for too long without seeing some doubts and controversy creep into the name. In the case of VeriFone (NYSE:PAY), it seems like the bears and bulls are increasingly at loggerheads. Bulls point to the ongoing upgrade and sales potential at traditional points like gas stations and retail stores, as well as the opportunity in the evolving mobile payment market. Bears argue, though, that organic sales growth isn't as strong as it seems, the upgrade cycle may be slow to develop and mobile could be as much a threat as an opportunity.

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Good Growth in Q2 ... Sort Of

VeriFone reported what looks like really strong growth in fiscal Q2, but the quantity and quality of that growth will be up for debate with some investors.

Revenue rose 64% as reported, with the company claiming nearly 15% organic growth. Organic growth was strongest in emerging regions like Latin America (up 46%) and Asia-Pacific (up 32%), while North America was flat. Here's the first point of possible controversy - some analysts claim that VeriFone's organic growth rates are inflated by including sales to legacy customers of acquired businesses as organic.

Margins are likewise open for debate. Adjusted gross margin improved more than a point from last year and nearly two points from the first quarter. On a GAAP basis, though, gross margin dropped more than a point.

SEE: Fundamental Analysis: Introduction

Operating income followed a similar trend and trajectory. Adjusted operating income rose 82% from last year, and the operating margin improved by two points. On a GAAP basis, though, operating income fell 4% and margin contracted by five points. Investors should realize that the difference between the two includes substantial amounts of amortized intangibles, restructuring costs and a deferred revenue step-down from an acquisition - if you wish to exclude those, that is your choice.

Are Upgrades and Mobile Going to Deliver As Expected?

VeriFone bulls are looking forward to both a significant hardware upgrade cycle and evolution to mobile payments to continue driving this story. However, the bears may be right with respect to the risks that these trends are overestimated.

On the upgrade side, Visa (NYSE:V) and MasterCard (NYSE:MA) are aggressively pushing upgrades to the more secure EMV terminal type. While this would represent substantial hardware sales for VeriFone, retailers are not exactly on the best of terms with Visa and MasterCard right now, and they're pushing back and looking to delay the transition. At the same time, there is the risk that companies like NCR (NYSE:NCR) and Micros (Nasdaq:MCRS) will capture some of this business by incorporating it into their own point-of-sale products.

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With mobile payments, nobody really knows what's going to happen. VeriFone's Global Bay technology is admittedly interesting, but I think it would be a mistake to write off competition from Intuit (Nasdaq:INTU) or Square.

The Bottom Line

VeriFone definitely has a very real growth opportunity in the ongoing migration towards credit and debit card usage in emerging markets. That said, I'm troubled by how free cash flow has decoupled from revenue over the past three years (revenue has increased each year, while free cash flow (FCF) as a percentage of revenue has declined each year). It doesn't invalidate or disprove the growth story at VeriFone, but it's an earnings quality risk factor.

SEE: Free Cash Flow Yield: The Best Fundamental Indicator

If VeriFone can grow FCF at a mid-teens rate for the next decade, these shares are arguably worth something in the mid-$40s. That's an ambitious growth rate for almost any company, but there should be enough growth potential in overseas markets and new applications to make that possible. Given the earnings quality concerns, I won't be buying shares but those investors who are comfortable with the accounting/reporting may just find a meaningfully undervalued growth story here.

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

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