PayPal (PYPL 2.90%) has been a frustrating investment over the years. It has only gained about 60% since it split from eBay in 2015. That's a meager 5.6% annual return. It has significantly underperformed the S&P 500, which is up nearly 150% (11.1% annualized).

What makes that underperformance worse is that at its peak in 2021, PayPal stock had surged more than 600%, only to lose nearly all its gain over the last two years.

That prior surge suggests that PayPal could have lots of upside potential if it can recover its lost momentum. Here's a look at what it would take for the fintech company to double in value over the next five years.

A look at what's plaguing PayPal

One of the things weighing on PayPal in recent years is sluggish profitability. PayPal's non-GAAP (generally accepted accounting principles) net income declined from nearly $5.5 billion in 2021 to $4.8 billion in 2022. While its earnings bounced back in 2023, rising to $5.6 billion, its profits only grew about 4% during that three-year period. The company's profitability has been under pressure due to rising costs.

Meanwhile, its free cash flow has declined from $4.9 billion in 2021 to $4.6 billion last year. Free cash flow would have fallen even further without the positive $1.7 billion impact of selling its European buy now, pay later (BNPL) receivables. Weighing on free cash flow was higher cash taxes and changes in working capital.

Slow progress

PayPal has taken several steps to reinvigorate growth and boost its profitability. Last year, the company cut 7% of its workforce. It recently revealed another round of job reductions, aiming to reduce its head count by another 9% in 2024. "We are doing this to right-size our business, allowing us to move with the speed needed to deliver for our customers and drive profitable growth," stated CEO Alex Chriss in a letter to employees.

The company's initial round of cost reduction paid some dividends last year. PayPal's operating income and margin steadily improved after bottoming in the second quarter. Non-GAAP net operating income grew from nearly $1.6 billion in that quarter to almost $1.9 billion by the fourth quarter, while its margin improved from 21.4% to 23.3%.

PayPal has also taken steps to reinvigorate its revenue growth. In early 2024, it unveiled six innovations to revolutionize commerce that it hopes will "solve real customer pain points" while "changing the world of payments and commerce," according to Chriss.

PayPal has also been using its copious free cash flow to gobble up its shares. The company spent $5 billion on share repurchases last year, which helped reduce its outstanding shares by 4%.

PayPal needs to stomp on the accelerator

Despite all the positives, PayPal hasn't got its growth engine back on track. After rising 24% last year, the company expects its non-GAAP earnings to flatten out at $5.10 per share this year, despite continued cost reductions and share repurchases. It expects stock-based compensation expenses, related payroll taxes, and restructuring charges to hold back earnings growth.

PayPal needs to start delivering sustained earnings growth. Ideally, its organic growth drivers will help reaccelerate earnings growth. As mentioned, the company has launched several innovations to revolutionize commerce that will hopefully reinvigorate its earnings growth rate. It's also streamlining operations, which should help boost its bottom line.

Another potential way PayPal could reaccelerate growth is by making an acquisition. PayPal has a cash-rich balance sheet ($17.3 billion of cash against $11.3 billion of debt) and a business that generates strong free cash flow. Because of that, it certainly has the financial flexibility to make a needle-moving deal. If PayPal can acquire a complimentary company that's growing fast, it could help supercharge its earnings growth.

The path to doubling

PayPal's sinking stock price has it trading at about 11.5 times forward earnings. That's dirt cheap compared to the broader market indexes (the S&P 500 sells for 21 times forward earnings, while the tech-heavy Nasdaq trades at more than 30 times forward earnings). The main factor driving those higher-valuation multiples is that companies in those indexes are growing their earnings.

If PayPal can reinvigorate its earnings growth rate, its stock price could double on multiple expansion alone, since investors pay a much higher valuation mulitple for growth stocks. Returning to a growth trajectory seems doable over the next several years, since the company is working to boost growth. On top of that, it has the financial flexibility to potentially make an acquisition that could accelerate growth. Because of that, it certainly seems possible that PayPal stock could double within the next five years.