Optical stocks slide 3% as AI infrastructure rally takes a breather

A two-day surge in optical connectivity stocks gave way to profit-taking Wednesday as Michael Burry's new short bets against the AI sector weighed on sentiment.

Optical communication stocks fell in pre-market trading Wednesday, with Corning Inc. sliding more than 3%, as a blistering rally fueled by AI data center deals gave way to profit-taking. Coherent Corp. dropped over 3%, while Credo Technology Group and Lumentum Holdings each fell more than 2%.

"Increasing investments in AI data centers are driving a major expansion in optical markets," Morgan Stanley analysts wrote in a note Monday, projecting the market could grow from roughly $30 billion in 2025 to more than $65 billion by 2028. The firm raised its price target on Corning to $127 from $103.

Corning had surged 15.7% Monday after announcing a $6 billion supply deal with Meta Platforms Inc. and jumped another 18% Tuesday on a partnership with Nvidia Corp. that included warrants to purchase up to 15 million shares at $180 apiece. The stock is up more than 85% year to date and has more than tripled over the past 12 months. Mizuho raised its target to $145 from $120 with an outperform rating, while Morgan Stanley maintained an equal-weight rating.

The pullback comes as the broader semiconductor sector faces headwinds from Michael Burry's new bearish bets, disclosed Tuesday in a Substack post. Burry said he shorted Tesla Inc. at $416.22 and established new short positions against Nvidia, Applied Materials Inc. and the iShares Semiconductor ETF. Micron Technology fell over 2% and SanDisk dropped nearly 4% in pre-market trading, reflecting the broader sector weakness.

Optical Connectivity Becomes AI's Bottleneck

The selloff follows a period of extraordinary demand for optical components, which hyperscalers need to link thousands of Nvidia GPUs within AI data centers. Corning said it would boost U.S. fiber production capacity by more than 50% and build three new manufacturing facilities in North Carolina and Texas, creating 3,000 jobs. The company's Q4 net sales rose 20% to $4.22 billion, with earnings per share jumping 72% to $0.62.

Nokia's optical networking business also saw explosive growth from AI data center buildout, the company said in its recent earnings report, leading it to increase investments in the business. The optical market's expansion is being driven by the limits of legacy network infrastructure, which is approaching capacity constraints, according to Morgan Stanley.

What the Short Bets Mean for the Sector

Burry's new short positions target the heart of the AI trade — Nvidia, semiconductor equipment maker Applied Materials, and the broad SOXX ETF — suggesting he sees valuation excess in a sector that has powered much of the market's gains. Optical stocks, which have ridden the same wave, are now caught in the downdraft.

For investors, the question is whether this is a temporary pullback in a secular growth story or the beginning of a broader correction. Optical connectivity demand is tied directly to AI CapEx, which remains elevated: SoftBank completed a $10 billion follow-on investment in OpenAI on July 1, and Japan committed 387.3 billion yen in AI subsidies through its Noetra initiative. But with Corning trading near all-time highs after a 63% first-half rally, some profit-taking was inevitable.

This article is for informational purposes only and does not constitute investment advice.