Nvidia Is One of the Most Profitable Businesses in the World. Here's Why the Stock Is Worth $311 a Share Right Now -- 39% More Than Its Share Price.

What are the most profitable companies in the world? Well, it all depends on how you define "profitable." Google's parent, Alphabet, rakes in the most total profits globally, at about $195.6 billion over the past 12 months. For profits per employee, per one report, the Federal National Mortgage Association, known as Fannie Mae, is on top, at $2.07 million per worker. Then there's net profit margin -- the percentage of revenue that a company keeps as profit. On that count, Nvidia (NASDAQ: NVDA) has an astonishing profit margin of 64%.

Nvidia is easily one of the most profitable companies in the world. Let me explain why its stock may be worth around $311 per share -- some 39% higher than its share price at this writing.

Image source: The Motley Fool.

Meet Nvidia

Once known for its gaming chips, Nvidia has pivoted profitably, becoming the largest provider of chips for data centers used in artificial intelligence (AI) -- while still making chips to power games and computers. It's also a software company, focused on robotics and AI, and it offers networking tools, as well. And it's known for data center platforms such as Blackwell, Hopper, and Rubin. (Those are the names of famous mathematicians and scientists -- David Blackwell, Grace Hopper, and Vera Rubin.)

It's also helping smaller companies afford AI infrastructure via a new AI compute infrastructure financing platform. And it's broadening the scope of its offerings, such as by adding custom AI processors and partnering with an optical interconnect technology provider. Most recently, it agreed to acquire Hugging Face, home to a key AI platform reportedly used by more than 18 million developers and 200,000 companies.

In a nutshell, Nvidia is increasingly involved in all kinds of fast-growing -- and highly profitable -- technologies.

Nvidia's valuation

It's therefore not surprising that the stock has rocketed upward, averaging annual gains of 65% over the past decade. With all that, you might expect the stock to be overvalued. But that doesn't seem to be the case.

Its forward-looking price-to-earnings (P/E) ratio of 25.1 for example, is well below the five-year average of 34.4, and its price-to-cash flow ratio of 31.4 is well below the five-year average of 50.8. This rapidly growing company appears undervalued.

How undervalued is hard to say, because valuations are always dependent on estimates and assumptions -- of future growth rates, future revenue amounts, and so on. But let's take a stab at it.

Consider the forward P/E of 25.1, which is lower than the five-year average. If we assume that the average of 34.4 is a more reasonable valuation, then the corresponding stock price would be about $311 per share. In other words, given the expected earnings over the coming year, if Nvidia's stock were trading at a forward P/E of 34.4, the share price would be $311.

You can do similar calculations with other measures, such as the price-to-sales ratio or price-to- cash flow ratio, and you'll end up with similarly higher estimated prices for Nvidia. We needn't focus too closely on any of them and can just take away that the shares seem undervalued, making the thought of investing in Nvidia even more appealing. Those buying now are likely to profit along with the company.

Selena Maranjian has positions in Alphabet and Nvidia. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool has a disclosure policy.