AI's 2 fundamental issues will lead to a bubble pop

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Artificial intelligence may not be as intelligent as it's made out to be, according to Goldman Sachs's Jim Covello.

The bank's global head of equity research, Covello is a technology industry veteran who has witnessed 30 years of transformative shifts such as the invention of the internet, the e-commerce revolution, the adoption of smartphones, and much more.

And to him, AI doesn't exhibit the signs of a truly groundbreaking innovation like the ones he's seen before.

In an interview with Business Insider, Covello explained the two reasons he's an AI skeptic — and how to invest when the rest of the market is buying into the AI hype.

AI comes with a trillion-dollar price tag

It's no secret that AI technology isn't cheap. Goldman Sachs estimates that data centers, utilities, and other infrastructure buildout costs will accumulate to over a trillion dollars in the next few years.

To Covello, the high cost of AI should raise some concerns.

Most noticeably, it's created an anticompetitive, winner-take-all market where only the largest mega-caps are able to invest in and develop the technology. Investors who have been following the meteoric rise of Nvidia are likely aware of how the chipmaker and other members of the Magnificent Seven have come to dominate the returns of the S&P 500.

AI buildout comes with intensive capital requirements that only the biggest companies can afford. Covello doesn't see any company that could come remotely close to challenging Nvidia's GPU production ability. He also points to the Netherlands-based ASML, which holds a monopoly on the lithography tools needed to produce chips.

Without competition, future costs of AI are likely to remain high. High barriers to entry mean that the technology landscape surrounding AI is unlikely to see new players anytime soon, giving the existing winner little incentive to lower prices. This contrasts dramatically with the environment that led to flourishing internet or e-commerce businesses, which Covello saw as much more democratized.

"I think there's probably too much complacency that the costs are just going to come down dramatically over time when you have some companies that are so incredibly well entrenched with their technology position," Covello said.

Covello also points out that AI use cases are replacing low-cost jobs with very costly technology — the opposite of other developments he's seen. "Most technology transitions in history have been a less-expensive solution replacing a costly solution," Covello said. He points to the e-commerce revolution, where Amazon was able to rapidly take market share away from traditional brick-and-mortar retailers due to lower storefront costs.

Covello sees call centers, a popular AI use case, as a prime example of a high-cost AI solution replacing a low-cost one. SoftBank and CVS are just two examples of companies developing an AI-enabled call center solution in an initiative to improve customer service experiences.

"A lot of people say, 'Well, we'll be able to replace call centers with AI,'" Covello said. "Even if you were to believe that, that's a very expensive technology where the world's going to spend a lot of money to build out AI capabilities over the next couple of years alone, to potentially replace relatively lower cost workers."