What Companies Are Too Big To Fail?

The 2007 subprime mortgage crisis led to government bailouts of both banks and car manufacturers. Automakers were given $17.4 billion in TARP bailouts, while $700 billion in Treasury funds propped up the banks.

Over a decade later, another economic crisis hit the United States and the rest of the world. The 2020 crisis crashed oil prices into the negative, spiked unemployment to record highs, and created a need for the government to again step in with a stimulus plan.

This time, it’s more widespread. Yelp data suggests 60 percent of business closures due to the pandemic are permanent. Many banks and car manufacturers that received bailouts in the previous crisis failed to reach pre-pandemic trading levels while competition overtook them.

So, what companies are too big to fail anymore?

PayPal Reaches Over 300 Million Users 

Bank of America Corp (NYSE:BAC) stock was annihilated during the 2008 crash and barely clawed its way back up to a market capitalization of over $250 billion when it again got pummeled with other banking stocks and entered 2021 trading below old highs.

Unlike BofA, PayPal (NASDAQ:PYPL) reached record highs when financial payments turned virtual. Its market capitalization more than doubled by year end, and it entered 2021 with a valuation that rivaled Bank of America’s. 

PayPal is a dominant force in ecommerce, especially after a buying spree that included Venmo, Braintree, and Honey. Since spinning off from eBay in 2015, it steadily grew revenue and easily achieved double-digit revenue growth each year.

By 2019, it generated $2.4 billion in profits from $17.7 billion in revenue from 12.4 million transactions. Its payment volume that year was over $700 billion from its 305 million registered users. That’s more than four times BofA’s 66 million customers.

With financial technology companies like PayPal in the game, 55 million unbanked and underbanked Americans had access to funds in spite of lockdowns. And because it specializes in consumer and business banking products, PayPal has much less exposure to housing and stock market conditions.

This means as the economy got worse during the crash, people leaned into PayPal and away from traditional banking services. The company benefitted from all the stimulus checks and mortgage/eviction moratoriums; people still spent money on other things.

Contactless payments and delivery were already acceptable for PayPal. Its partnership with Honey helps people find great deals, and that puts a browser extension onto computers for valuable data collection.

This new-age Fintech company has the buying power to takeover Wells Fargo (WFC) and prove its necessity in the post-pandemic economy.

And the company beat banks to the punch in accepting digital currencies by supporting cryptocurrency spending through its PayPal and Venmo apps. This puts it in new territory in managing both fiat and digital wealth from a wide spectrum of customers.

But it’s not alone in relieving financial friction.

Square Rallied 3,000% And Could Still Soar

Citigroup Inc (NYSE:C) was among the first banks to receive a government bailout in 2008, and its stock is still trading for pennies on the dollar. The company slowly pulled itself up from the dredges of death only to be pulled back down when the world went ever more digital.

At the start of 2021, it was still trading for nearly 20 percent below former price levels.

Meanwhile, Square Inc (NYSE:SQ) provided over 3,000 percent returns to investors in its first six years as a public company. In 2020 alone, share prices rose from $32.33 at the crash to nearly $250.00 per share.

This gives Square (SQ) a market capitalization comfortably over $100 billion. It did this by finding a lane even PayPal wasn’t servicing well: point-of-sale (POS) terminals. Using this, it quickly built an infrastructure to enable easy payments in any environment.

Because of Square, businesses could operate on the road and even use smartphones as credit card readers. The ability to accept payment via any method possible means more sales and profits for the business.

And it smartly bought Cash App for a consumer presence. This Fintech startup outpaced tech giants like Facebook (FB) to enable smooth and instant peer-to-peer transactions. It also has functions for online payroll, gift cards, and more.

Cash App alone had 24 million users at the end of 2019, and it grew that to 40 million by June of the next year. This eclipsed even the growth of PayPal’s Venmo, although it’s still short of Citigroup’s 200 million.

This broad suite of financial applications is arguably more important than a credit card or even traditional bank’s app to our financial infrastructure though.

And financial services aren’t the only ones too big to fail.

Tesla Inc

General Motors Company (NYSE:GM) received one of the biggest auto bailouts in 2008. In fact, it received two bailouts after filing for bankruptcy protection. Although it did recover to pre-pandemic trading prices in 2020, that’s pretty much all it did, showing no real progress to breach $50 per share today.

Although the pandemic hit all car companies, Tesla (NASDAQ:TSLA) had a banner year that seemed like it never happened. It gained over 800 percent in a single year for investors on the back of its inclusion into the S&P 500.

CEO Elon Musk put the pedal to the metal to quickly expand its manufacturing operations and build out a network of electric vehicle charging stations. This could signal a shift from oil to electric, and it’s going to happen fast once he figures out how to scale the company.

The most popular method being tossed around is to buy an existing car manufacturer. Because it’s now nearly a trillion-dollar company, Tesla can cut costs by not building its own footprint to scale production up.

Now that his future is being realized, could the future reach a point where you’ll either be driving a Tesla vehicle (maybe even it driving you) or using a Tesla charging station while on the road? Either way, this company wins.

Most importantly, none of the above three companies ever had a scandal to match the scale of their legacy predecessors. That doesn’t mean they’re immune, but it does shine a light on who can prevail when the so-called “too big to fail” companies surface.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.