Not long ago, prospects for technology companies seemed unlimited, and tech stock prices reflected near-infinite possibility.

But that world -- where there was no such thing as competition, where size would never slow growth, where the ups and downs of the world economy were meaningless -- is gone. As the market has struggled to figure how to appropriately price technology, technology stocks have gone through a painful, multistage revaluation. And even as the

Nasdaq Composite

brushes up against its shock lows of the spring, it's unclear if the revaluing of tech is anywhere near over.

Scrubbing Bubbles

"I don't think we're there yet," says

J.P. Morgan

equity strategist Doug Cliggott. "Tech stocks are a lot cheaper now than in the spring, but it's difficult to make the case that they're attractively valued."

Oy
Feeling the Nasdaq's pain

The trailing price-to-earnings ratio on tech stocks in the

S&P 500

weighs in at around 44 these days; in the spring, it was as high as 78. That's still pretty high compared to the overall S&P P/E of 25, but a high P/E can be justified if a company's earnings are growing rapidly.

The problem is that even including the effects of this tech correction, investors are still paying a hefty premium for tech stocks over nontech companies with similar growth rates. According to research from

Merrill Lynch's

quantitative group, tech companies that Merrill analysts expect will grow at 30% or more over the next five years have forward P/Es that are nearly double those of nontech companies expected to show similar growth.

That investors are willing to pay nearly twice as much for tech growth is a little ridiculous, thinks Merrill chief quantitative strategist Rich Bernstein -- and a sign of more selling to come. "The bubble is deflating," he says, "but it has not deflated."

The Bigger Question

The other problem is that the growth rates that analysts have been assuming for tech have lately been called into question. Growth in technology earnings generally have been trending up. Lately, however, a series of earnings warnings have suggested that tech profits are far more beholden to economic cycles than investors had assumed.

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"I think tech could still correct further," says

Morgan Stanley Dean Witter

chief U.S. investment strategist Byron Wien. "So many companies are disappointing that people are questioning what the growth rate is. It's one thing to pay one or two or three times the growth rate if you know what the growth rate is. It's another thing if you do not."

Irrational Inexuberance

Closer to the trading floor, however, the notion of some appropriate valuation for tech stocks gets a little cloudier.

"When it comes to valuation, there is not a rational process," says Jeff Matthews, president of the Connecticut-based hedge fund

Ram Partners

. "It's just money flows go in and money flows go out and people make up excuses to buy and sell things.

"I think that once we get the panic lows, things will come back," Matthews continues. "The stocks that have held up the best will be the ones that lead. And the ones like

Lucent

(LU)

which Matthews is short and

Apple

(AAPL) - Get Report

and

Dell

(DELL) - Get Report

will be left behind."