Singapore Markets closed

The 3 Best Artificial Intelligence Stocks of 2017

Danny Vena, The Motley Fool

Over the course of the last few years, the world has embarked on a transformation that is the result of artificial intelligence (AI). These changes have come about primarily because of advances in the AI technique of deep learning, which processes mass quantities of information and is able to establish relationships and draw conclusions based on the data.

While each of the following three companies represents a distinctly different approach to the AI revolution, they have all benefited enormously by being among the early adopters of this groundbreaking technology. Read on to find out why Adobe Systems Incorporated (NASDAQ: ADBE), NVIDIA Corporation (NASDAQ: NVDA), and Micron Technology (NASDAQ: MU) were among the best performing AI stocks of 2017.

A man on a darkened stage with a colorful background with the words Adobe's Sensei, the company's AI system.

Adobe is going all in on AI. Image source: Adobe.

Creative application of AI

Adobe is best known for its Portable Document Format (PDF), which is used to create and exchange documents, and its suite of creative software tools like Photoshop, Illustrator, and InDesign. Its migration to a software-as-a-service (SaaS) model put the company in a position to make AI innovations available to its growing customer base, by infusing AI into its products and integrating the technology into its cloud. The company has also embarked on a mission to train all its technical employees in the fundamentals of AI. It developed an AI system dubbed Sensei, a Japanese word for honored teacher or mentor. 

These moves are paying off for the creative-software specialist, and the company has had a record-breaking year. In its fiscal 2017 fourth quarter (which ended Dec. 1, 2017), Adobe reported revenue of $2 billion, which grew 25% year over year. The company produced stable gross margins and operating expenses that fell to 54% of revenue, down from 57% in the prior-year quarter. This resulted in net income that grew 37% over the prior-year quarter.

Shares of Adobe were up 70% over the preceding 12 months. Investors have high hopes this will continue, driving its valuation up to a nosebleed 51 times trailing 12-month earnings.

NVIDIA Titan X AI processor.

NVIDIA, the maker of the Titan X graphics card, saw the potential for AI early. Image source: NVIDIA.

Processor to the AI stars

The need to process vast amounts of data means that AI systems have to be fast. It turns out that the same parallel processing capabilities that allow graphics processing units (GPUs) to render lifelike images in computer games also make them a perfect solution for training AI systems. NVIDIA pioneered the GPU and was among the first to realize the processors' potential for AI applications. The company also worked to optimize its chips for this purpose by combining elements of software with its processors, allowing researchers to accelerate their AI models.

Early and frequent innovations geared toward AI have catapulted NVIDIA's results in recent years. In its fiscal 2018 third quarter (which ended Oct. 29, 2017), NVIDIA reported revenue of $2.6 billion, up 32% over the prior-year quarter, and gross margins that increased 50 basis points to 59.5%. Year-over-year spending increased by only 24%, driving net income to $838 million, up 55% year over year. The biggest revenue gains were in the company's data center segment, which supplies chips for AI. This division has produced triple-digit growth of 163% on average, in each of the last six quarters, and now accounts for 19% of NVIDIA's total revenue. 

NVIDIA stock gained 81% in 2017, but investors may be wary of the company's valuation, currently trading at a hefty 48 times trailing earnings. 

A Micron NAND memory chip.

Micron's chips are powering AI and autonomous driving. Image source: Micron.

Providing the memory for AI and self-driving cars

The data processing done by AI systems requires a significant amount of memory, and Micron is one of the world's largest producers of memory chips, providing DRAM and NAND flash chips, among others. The company's relationship with NVIDIA has expanded over the last year, and Micron's solutions stand to benefit from continuing developments in self-driving cars. It recently introduced new processors that help autonomous vehicles detect road hazards, and Micron said it is already providing its fastest chip to a number of automotive customers.

These ongoing trends have shown in the company's results. In Micron's fiscal 2018 first quarter (which ended on Nov. 30, 2017), the company reported net sales of $6.8 billion, up a hefty 71% over the prior-year quarter. At the same time, gross margins more than doubled from 25.5% to 55.1% year over year. Disciplined spending carried that growth to the bottom line, producing net income of $2.68 billion, up from just $180 million in the prior-year quarter. 

Investors are clearly expecting normal chip cycles to return and hurt future performance. Even as Micron's stock was up 87% last year, it ended the year with a dirt-cheap valuation of just 6.4 times trailing earnings. 

AI is here to stay

Artificial intelligence is truly a transformational technology, and companies that seized on the opportunity early on have reaped the benefits. AI is still in the early stages, so watch for companies that can effectively harness the technology to drive results going forward.

More From The Motley Fool

Danny Vena owns shares of Adobe Systems. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool recommends Adobe Systems. The Motley Fool has a disclosure policy.