Why Lumentum Sank Today

Shares of optical leader Lumentum (NASDAQ: LITE) sank on Monday, falling 9.8%.

Lumentum has been a key beneficiary of the AI build-out, as optical lasers are increasingly important for achieving the speeds required for AI training and inference. Last week, Lumentum CEO Michael Hurlston said in a Bloomberg interview that the company was "almost sold out" for 2029, sending shares to an all-time high.

However, concerns over the sustainability of the AI boom came to the fore over the weekend when another AI company CEO said many investors are treating it like a "casino."

Broadcom CEO Hock Tan curbs AI enthusiasm

Over the weekend, Broadcom (NASDAQ: AVGO) CEO Hock Tan spoke at an industry conference in Singapore. At that conference, he said many investors don't really know what they are investing in, and that they, "set very extreme expectations only to find out that it's almost like they are in a casino."

Tan went on to note that while leading AI companies, such as OpenAI, are generating significant revenue at the moment, it remains unclear whether they will have a sustainable, profitable business model that justifies the enormous amount of current AI spending. He noted that enterprises are using many AI tokens, but mostly in an experimental manner that isn't necessarily economical in the long run:

When you are a kid, you go to a video arcade and play. Your parents give you $10 of tokens, you finish it in 10 minutes and you haven't learned anything... That's what happening in enterprises today."

Those comments appeared to generate a big pullback in the main AI infrastructure stocks on Monday. Given that Lumentum has been one of the big winners, surging to all-time highs last week, it's no wonder its stock is down even more than other chip stocks today.

Image source: Getty Images.

Lumentum's bull case remains as long as the AI story remains as well

Optical laser stocks have rallied so much this year because the network requirements of AI usage are spurring not only an increase in the number of data centers, and communications between those data centers, but also the replacement of copper wiring by optical connections within server racks and even servers themselves.

This compounding growth is why optical stocks remain attractive; however, this depends on the overall health and need for AI data centers. Hock Tan threw some cold water on the growth thesis over the weekend, but his statements were far from declaring the AI build-out a "bubble" that will inevitably burst. The bull case could remain intact, as long as end users eventually get value from the technology, and sustainable AI business models are developed.

Billy Duberstein and/or his clients have positions in Broadcom. The Motley Fool has positions in and recommends Broadcom and Lumentum. The Motley Fool has a disclosure policy.