Baidu, Inc. (NASDAQ:BIDU) is the largest online search engine in China, and since its entry into the realm of artificial intelligence (AI), the company has been integrating its AI know-how into nearly every facet of its business. What investors may not know is that this process produces a virtuous cycle that continues to feed itself.

In the case of Baidu, it has been engaged in an area of AI known as deep learning. Algorithms and software models are used to develop artificial neural networks that mimic the human brain's ability to learn. Vast amounts of data are required to train the system, and Baidu's online search engine provides a vast depository of information on which to draw. Once trained, these AI systems are then used to process data at much faster rates than their human counterparts can and are skilled at detecting patterns. One key aspect of deep learning is that these systems become more useful the more they are used.

An external view of Baidu's Silicon Valley AI Lab.

Baidu is in a virtuous cycle with its AI. Image source: Baidu.

Integrating AI to improve its business

The ability to detect patterns can be used in a wide array of areas, and these systems are particularly skilled at tasks such as image recognition, making more precise online search recommendations, and more accurately predicting traffic conditions for users of its Maps service.

The company has also applied its AI acumen to better estimating delivery times for its Baidu Delivery service and making customized restaurant suggestions for its recommendation platform, Nuomi. It uses AI to recommend content to its millions of users of its iQiyi video streaming service and provide more relevant content for its news feed.

Virtuous cycle

The process of improving products with AI is a two-way street. When it makes recommendations, the AI system receives feedback from these diners and drivers and streamers, which allows the system to make more reliable recommendations in the future. The system improves with each interaction.

Baidu is using its AI system to develop self-driving car technology in China. It recently announced the acquisition of xPerception, a start-up in the field of computer vision. The company focuses on object recognition and depth perception that can be used in the area of autonomous vehicles and can also be used for drones.  

This virtuous cycle is the secret sauce of Baidu's AI system. By using AI, it improves its products and recommendations. By integrating the feedback into the AI system, it improves the relevance of future recommendations. This holds true across the plethora of ways that Baidu is using its AI.

An exterior view of the Baidu Institute of Deep Learning in China.

Deep learning is at the heart of Baidu AI systems. Image source: Baidu.

Open-source autonomous driving

Baidu also announced that it would open-source its platform for autonomous driving, in a move that was said to be inspired by Google's open sourcing of its Android platform.  The Alphabet Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG) division came to dominate the smartphone market with its Android operating system, by making it available to all comers, thereby maintaining its supremacy in mobile search.

This is a smart move, as the cumulative data that's acquired from self-driving cars will make the systems safer, and Baidu hopes to become the de facto leader of such data in its native China.

Investor takeaway

Baidu's strategy regarding AI has yet to bear fruit. While the company had been investing large sums to bolster its AI capability, and it has been seeing incremental improvements in a variety of areas, it has yet to produce any significant increase in revenue.

In the most recent quarter, the company marked its third consecutive quarter of declining revenue, though Baidu hopes to return to growth later this year. The revenue from the company's most recent quarter increased 6.8% over the previous year quarter to $2.45 billion, and earnings of $258 million were down by 10.6% year-over-year.

The area of artificial intelligence offers exciting possibilities, but investors would more likely be excited by a return to growth in revenue and earnings. 

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.