On Robinhood Markets' (HOOD 2.47%) most recent earnings call, CEO Vlad Tenev said he is challenging the company to reach profitability on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis by the end of the year. Considering the company just reported a $143 million adjusted EBITDA loss in the first quarter, its largest loss since the start of 2020, it looks like Robinhood has its work cut out for it.
Let's take a look at what the company will have to do to achieve adjusted EBITDA profitability by year's end.
Improving ARPU
Robinhood defines adjusted EBITDA as EBITDA minus non-cash items such as share-based compensation, the change in fair value of certain convertible notes and warrants, and other items the company believes are not indicative of its operating financial performance. Overall, adjusted EBITDA is a good measure of Robinhood's core profitability. The online broker did well with adjusted EBITDA in 2021, but that was largely due to the elevated trading activity during the meat of the pandemic.
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To achieve adjusted EBITDA profitability this year, Robinhood's CFO Jason Warnick said Robinhood will need to increase average revenue per user (ARPU) from the low $50s in the first quarter of 2022 to somewhere in the mid-$80s, a number it hasn't gotten close to in several quarters.
Image source: Robinhood.
That means increasing engagement and deepening relationships with customers to increase ARPU. Warnick said management currently thinks the company will see a lift this year as it rolls out fully paid securities lending, where users essentially give Robinhood permission to lend out stocks they own to financial institutions and other investors. For facilitating the transaction, Robinhood collects a fee and gives a portion of that fee to the user who is lending the stock.
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Rising interest rates will help Robinhood because the company can invest cash at higher rates and make wider margins on some of its various lending products. And then Warnick said Robinhood will benefit more from instant withdrawals and other products it is rolling out to active customers. Tenev said there will also be a focus throughout the year on "cost discipline."
"All in, we think that we can get there. It's an aggressive goal. It's going to take, I think, a lot of focus on operating costs, and we've got the commitment of the whole team to get there," Warnick said.
Can Robinhood achieve this goal?
Given the tough start to the year, signs of weaker trading activity, and difficult market conditions that could discourage retail traders, achieving adjusted EBITDA profitability will undoubtedly be a challenge. But the company will benefit from rising rates, which are now likely projected to rise higher than management likely anticipated earlier this year.
It will also be key for Robinhood to further engage its most active user base and roll out products they need and want. I think it's too difficult right now to make a call on whether the company can achieve this goal, given all the uncertainty, but watch ARPU and also pay close attention to whether new products are gaining traction among users.
