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Internet Bubble Started in China, West Follows: Expert

With the recent spate of high valuations and IPOs the warnings of another tech bubble have been rife. But the distinction between technology companies and internet companies is crucial when discussing the issue, one expert said.

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"Of course these valuations are extraordinary especially as some of these are only marginally profitable," Keith Woolcock, a technology analyst at investment research firm 5th Column Ideas, told CNBC.

"Look at Microsoft, look at any of the big names they have either dramatically underperformed this year, there is no tech bubble there is an internet bubble." This bubble started in China and Chinese internet stocks, which took off in September, have just had a very sharp correction, he said.

“It’s interesting that China has led the West in this and we are beginning to catch up,” Woolcock added.

The original tech bubble at the start of the century involved significant numbers of retail investors, who have so far been slower to appear this time around. However, Woolcock said that the attraction of tech stocks was undeniable, particularly when accompanied by a reasonable amount of hype.

Investors Beware

“You have to know what your risk tolerance is and know the animal you are dealing with," he said. "When you buy these stocks, when this bubble gets under way it will be like entering the matrix, it’s like a mind altering drug. When the bubble really takes over even sane people can lose their mind, that’s what you have to have in mind."

“Let’s put this to bed straight away, these stocks are actually impossible to value, what you are buying is an option and the only valuation I think you can use is to gauge crowd psychology, it’s as simple as that," Woolcock said.

He said the problem with the internet bubble of the nineties was "there were lots of people who either had MBAs or some other finance degree and they use metrics like discounted cash flows; with these you can prove anything, analysts can be preposterous." "The more precise you try to become to more erroneous the price becomes, that’s the problem,” Woolcock added.

Other analysts argue investors should steer clear of tech stocks altogether as they have a social cache and make a great talking point but this comes with a price premium.

“It’s not a good investment unless you want to pay that premium to talk about something because you invest in these trendy companies,” Patrick Armstrong of Armstrong Investment Managers told CNBC.

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