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The ongoing doldrums at PAX Global Technology (OTCPK:PXGYF) bring to mind a semi-famous quote (often misattributed to Mark Twain or Winston Churchill) that , “a lie can travel halfway around the world while truth is putting on its boots.” Reports of a serious security breach with the company’s terminals, including their use in cyberattacks, and an investigation by the FBI (among others) attracted plenty of negative attention … but hardly any of the sites reporting the sensational accusations reported the follow-up that Palo Alto Networks ( PANW) found nothing wrong or out of the ordinary with those terminals.

It remains to be seen how much impact this has had on PAX’s global business, but investors will get a look later this month when the company reports results for the second half of 2021. I expect to see healthy growth in Latin America, but what management has to say about the near-term prospects for growth will clearly be material for the stock. At this point, although the shares look quite undervalued on what I believe should be conservative assumptions, the liquidity and lack of transparency are major issues for me when considering a potential investment.

PAX shares were hammered back in October of 2021 on reports that PAX’s point of sale (or POS) terminals had serious security vulnerabilities that were being exploited by criminals to launch cyberattacks and/or steal data. Moreover, reports indicated that agencies like the FBI and Homeland Security, as well as MI5 were investigating the company and the reported vulnerabilities. Many of these reports were also quick to note that Fidelity National Information Services’s (FIS) Worldpay business pulled PAX’s systems due to these vulnerabilities.

Funny, then, that these sources didn’t also report the follow-up. Namely, that PAX commissioned Palo Alto Networks’s Unit 42 to investigate the manner, and they (Palo Alto) found no evidence that information was transmitted to any destination but the payment processor, nor that the systems acted in any fashion other than would be expected for their normal function. Likewise, those sources didn’t report that Worldpay represented a tiny piece of PAX’s business and at least some of Worldpay’s clients were continuing to use PAX’s systems.

I would expect that management would have more to say on this issue with the upcoming earnings report, as the shares clearly have not recovered since the report. Given the severity of the accusations, I can understand if some customers opted for a “better safe than sorry” approach and switched to other providers, but PAX built the share it has (or had…) for valid reasons relating to performance and value-for-money, and those reasons are still in play.

In any case, I have no idea whether this is the last word in the matter, but I would be surprised if there were vulnerabilities that remained hidden to Palo Alto’s analysts when they were intentionally hunting for them.

While I don’t believe it has had a material impact on the shares (the shares have drifted between HKD 5.00 around HKD 6.50 since the security vulnerability report), I will be very interested to hear what, if any, comments management makes about the company’s business in Russia. Management, as per the norm here, has never given much clear information about their business in Russia, but did note that it had “significant sales” in Russia during its first half report for FY’21.

Russia isn’t talked about much in the global POS market, but it is a meaningful potential market for companies like PAX. There are about 1.5 “payment cards” per person in Russia, but the majority of those are debit cards and there has been considerable growth in recent years in the use of digital wallets and mobile payment technologies. With that, there is increasing demand for terminals able to handle traditional card transactions as well as contactless transactions, and that fits well within PAX’s wheelhouse.

To that end, I would hope to hear something from PAX management about the size of their business within Russia and how the company is responding to Russia’s aggression in Ukraine amidst widening boycotts and companies terminating their business in Russia.

As has been the case for some time, PAX’s future does not lie in the U.S. market, the developed markets of Western Europe, or its original home market of China.

Sales to China have continued to decline, falling another 7% in the first half of 2021 and now representing less than 10% of total sales (versus over 50% back in 2015). While the European and North American markets did see significant growth in the first half, these markets combined contribute less to PAX’s revenue than Latin America and Russia (and other former Soviet states). Share growth against entrenched competitors like VeriFone and Ingenico is still possible, and you will see PAX terminals from time to time if you pay attention, but these are slow-growing markets and PAX has struggled to break in, even despite events like the EMV transition and a move toward digital/contactless payments that were supposed to create new opportunities.

Instead, PAX’s best opportunities remain in markets like Argentina, Brazil, India, Indonesia, Mexico, and Vietnam where companies like VeriFone and Ingenico don’t have the same entrenched position and where PAX’s more compact, cost-effective, and flexible smart Android systems have real appeal to merchants and merchant acquirers.

In addition to the hardware, I believe the company’s PAXSTORE ecosystem remains an important competitive offering, with customers able to access a host of 3rd-party software offerings for functions like inventory, bookkeeping, customer rewards programs and so on. By relying on third-party developers, not only does PAX sidestep the need for expensive and time-consuming market-specific app development, they also position themselves as a high-margin toll-taker that doesn’t have to pick/predict “winners”, nor do they have any incentive to coax (or force) customers to use any particular software stack. Not surprisingly, this isn’t a particularly popular feature with merchant acquirers in the U.S. that want to push their own software offerings as value-added services.

Only getting two data points per year (two half-year earnings reports) makes modeling a challenge, particularly when you have such a significant high-profile event that could drive away customers. At a minimum, I would like to see PAX report sales figures on a quarterly basis, as many large European companies do (companies that still only report full financials twice a year). To that end, I definitely see significant modeling risk not only to the upcoming results, but for 2022 and 2023 as well. Likewise, PAX is not particularly well-covered and does not go into much detail where guidance is concerned.

I believe my model is quite conservative, and I’m only looking for high single-digit long-term revenue growth from PAX, as I do expect business momentum to slow in the coming years. Some of that is due to market saturation in markets like Brazil and what I believe will be an ongoing downward pressure on equipment sales prices and margins. I do think PAXSTORE can provide a source of high-margin revenue, but the per-transaction value to PAX appears to be quite small (another area where more clarity/disclosure would be nice), and “service” revenue was less than 3% of 1H’21 revenue.

I do expect hardware margins to come under pressure as time goes on, and again it will be some time before high-margin service revenue is large enough to meaningfully offset that. At this point, I’m expecting PAX’s FCF margins to erode from a historical level in the low double-digits to the high single-digits, but still enough to drive mid-to-high single-digit FCF growth.

If PAX can grow FCF at even a low single-digit level from reported trailing 12-month levels, the shares are meaningfully undervalued, such is the pessimism around these shares. Unfortunately, even with that potentially extreme undervaluation, I don’t see myself buying in – I insist on better disclosure and communication from companies in my portfolio and over the years I’ve found situations like this to be more trouble than they’re worth. They can sometimes pay off handsomely, but it’s all too common for the shares to languish, particularly when there is little institutional support. With that in mind, I would advise readers intrigued by the valuation, opportunity, and negative sentiment here to at least perform thorough due diligence before making a substantial investment.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.