What happened

Shares of food-delivery service DoorDash (NYSE:DASH) ran up 6.5% through 1:40 p.m. EDT this afternoon -- and you can thank RBC Capital for that.

So what

In an initiation of coverage announced after close of trading yesterday (such that investors weren't able to act on it until today), RBC rated DoorDash stock "outperform" and assigned a $175 price target to the stock, which presently trades for about $151 a share.

DoorDash's "differentiated strategy ... has elevated it into being the #1 player in U.S. restaurant delivery," points out RBC, as the company focuses on growing its gross margins for now (presumably with the intention of working on operating and net margins later). Already, says the analyst, this strategy has helped DoorDash build "a lower fulfillment-cost delivery business" that is beating the competition.

(In this regard, though, it's perhaps worth pointing out that DoorDash's gross margins have been falling sequentially for two straight quarters now.)  

Man wearing insulated backpack with a bicycle delivering food to a woman.

Image source: Getty Images.

Now what

Also worth pointing out: Implicit in RBC's argument is the understanding that DoorDash is not a profitable company -- nowhere near profitable in fact (and arguably moving further from that goal the more its gross margins slide). Indeed, most analysts who follow the stock don't expect DoorDash's pro forma profits to turn positive before 2024, according to data from S&P Global Market Intelligence.

For this reason, RBC bases its valuation of DoorDash stock not upon profits (which it doesn't have) but rather on revenues (which it does have and which are growing -- up 11% sequentially). Accordingly, RBC values DoorDash at 11 times estimated 2022 revenues, which are expected to be about $5.1 billion -- up 21% from 2020 levels.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.