For investors looking for solace from their sinking software shares, here's a sliver: This is what normal feels like.

After years of unbridled gains that led to meteoric valuations, the stock market is getting back to its roots; it's judging how much companies should cost based on how much money they make. While this has been a developing trend in technology this year, business software makers have been largely immune to it. Until now, that is.

Many investors have looked at shares of companies such as

i2 Technologies

(ITWO)

,

Oracle

(ORCL) - Get Report

and

Ariba

(ARBA)

in bewilderment as they've established new 52-week lows on a daily basis. After all, these stocks were supposed to hold up better than others because the software they make helps companies save money. In tough economic times, that software should be in demand, the reasoning went.

Well, that story is beginning to grow some hair, as they like to say on Wall Street. But that's only part of it. Another reason they're sinking is valuation. For software stocks, it suddenly matters again.

"The thing that people don't realize is that the last two years have been an anomaly," says Patrick Walravens, an analyst at

Lehman Brothers

. "In the early 1990s, you could be a great tech company and the stock might move 10 bucks in two years, and five times revenue was a stellar valuation for a hot company. I mean, the things traded on price-to-earnings multiples. So maybe we're going back to that."

Look at supply-chain company

Manugistics

(MANU) - Get Report

. That company lost 6.4% of its value Friday after

C.E. Unterberg, Towbin

analyst Catherine Moore said it was overpriced relative to its historical trading range.

Moore's reasoning was the same twofold logic that's hitting the sector as a whole. First, it's starting to become clear that software cannot remain immune to an economic slowdown forever. As the economic outlook sinks, investors need more and more justification for putting money into stocks. Which means price suddenly comes into play once again.

"This isn't just a moderation in spending; things are getting really bad out there," Moore said. "Now that we're seeing that you have to be cautious and that these guys are going to have to struggle to sell software ... we decided it was time to look at the valuation of the software group."

In the past three weeks, she said, the average multiple for supply-chain and e-commerce software makers has come down from 20 times trailing 12-month sales to 10 times that metric. In Manugistics' case, it still wasn't low enough, according to Moore.

"I looked at valuations prior to 2000, and for Manugistics, their average valuation was four and a half times trailing 12-month revenues," said Moore, who viewed valuations back to 1996. "As of last night, it was trading at 10 times trailing revenues."

Others also think valuations are far from cheap. For instance, Ariba is off 90% from where it traded in September. But it still trades at 67 times fiscal 2001 earnings estimates.

"It's never true that something that's trading at 70 times earnings is a bargain," said Nick Moore, a portfolio manager at

Jurika & Voyles

in Oakland, Calif., who specializes in software. "You're still talking about a value that's higher than

Microsoft

(MSFT) - Get Report

ever had when they were growing at 90% per year. Even then, they never traded at 30 times forward earnings." (Moore doesn't have a position in Ariba.)

Which is about the range where many people think software stocks ought to be valued -- somewhere between 25 and 45 times earnings. For Ariba to trade at 30 times 2001 earnings, it would have to hit $8, half its current value.

In that sense, Oracle, one of the biggest software companies whose stock has been testing new lows lately, is still at the high end of that range, but it's getting lower -- it currently trades at around 38 times next year's earnings. Yet Oracle's fiscal fourth quarter, which ends in May, usually brings in the largest chunk of its overall revenue, which might be bad given current conditions.

"They're going to have a tough May quarter, and expectations are pretty high for them," said Jon Ekoniak, an analyst with

U.S. Bancorp Piper Jaffray

who rates Oracle a buy. "Their biggest quarter of the year happens to be coming in the middle of what we're seeing as this slowdown."

A bunch of bad first-quarter earnings reports may make some of the pricey software stocks more palatable, said Moore of Jurika & Voyles.

"The question is, do you leave the year owning these things? Yes, I think you do. But do you enter it owning them? No," Moore said. "I don't think in advance of the March earnings, you've seen the worst of the bad news, and I don't think at these valuations, you can withstand that news when it comes." After it comes, though, it could be time to buy, he said.

In other words, things aren't really all that bleak, but they are returning to more "normal" levels. Normal's just a lot lower than where these stocks have been until now.