The software company also came up short on expectations for revenue in the latest quarter

Shares of AppLovin were down more than 18% on Thursday.

AppLovin's stock was one of the S&P 500's biggest decliners on Thursday, as investors reacted not just to underwhelming earnings but also to new information suggesting that the company's artificial-intelligence models aren't competitive enough.

Shares of AppLovin $(APP)$, which operates a software platform used by businesses and game developers, were down 18.6% in afternoon action and on track for their largest percent decline since March 2025.

AppLovin also develops AI models for digital advertising. The company's models predict ad engagement, click-through rates and site engagement - data useful for advertisers targeting the gaming world, e-commerce and subscription services.

According to the AppLovin management, model performance is a key growth driver for the company. But model advances were "smaller than normal" in the second quarter, William Blair analyst Ralph Schackart wrote in a note, adding that the company's next model release was delayed until after the quarter ended.

Schackart said that the debate in the aftermath of the quarter will center on whether the AppLovin experienced a "fundamental slowdown" or a "timing-related volatility in its model development cycle."

AppLovin reported revenue of $1.92 billion for the second quarter, up 53% from the prior-year quarter, though analysts tracked by FactSet were expecting $1.94 billion.

The company also reported adjusted earnings before interest, taxes depreciation and amortization (Ebitda) that was $1.2 million below the low end of its guidance.

Management guided for between $2.055 and $2.085 billion in revenue for the third quarter, while Wall Street analysts were looking for $2.074 billion.

Benchmark analyst Mike Hickey wasn't convinced by AppLovin's explanation of the second-quarter financial shortfall. In a Thursday note, he wrote that while management said that "architectural changes and additional compute" could help support development of more complex models, he doesn't buy that view.

"We are not convinced that higher compute alone provides a durable solution to improving the cadence and predictability of meaningful releases," he said.

Hickey lowered his price target to $500, from $775. AppLovin shares were trading at just north of $340 Thursday, at last check.

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-Hannah Pedone