Maybe it's a strong case of denial that's sending people out to buy software stocks. It certainly isn't the fundamentals.

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With the disaster that was the first-quarter earnings season wrapped up, many software names are now priced higher than they were a month ago, despite gloomy results and the lowered guidance they gave on their conference calls. Companies said forward visibility was about as clear as a tub of butter and still saw their stocks jump, proving that in the blind land of software right now, there are no one-eyed men. Everyone is a king.

Which is why it's time for investors to open their eyes.

"I thought we had all learned our lesson in the B2B space that at the end of the day, what matters is earnings," says Patrick Walravens, an analyst at

Lehman Brothers

who watched companies like

Ariba

(ARBA)

,

Commerce One

(CMRC)

and

i2 Technologies

(ITWO)

issue profit warnings for the first quarter and little visibility for the second. "The recent run-ups we've seen don't make a whole lot of sense to me. I don't see any evidence yet that things are improving."

Since the first week of April, Ariba is up 101%,

Oracle

(ORCL) - Get Report

is up 28%, i2 is up 66% and

Microsoft

(MSFT) - Get Report

has gained 36%. All those companies either warned, or only came in above reduced estimates for the first quarter, before taking future guidance down. None said visibility going forward is clear.

The post-earnings trend of these stocks moving up on lowered or foggy sales forecasts is especially disturbing. While software stocks were starting to look attractive for a while as the market made a momentary lapse back to reason and sensible value, they've now become expensive again. For instance, the average stock in Walravens' universe of B2B and supply-chain management stocks is now trading at 87 times 2002 earnings. Beleaguered Ariba takes the prize for the most ridiculously priced stock, at 467 times Walravens' 2002 earnings estimate. It's followed by

Matrix One

(MONE)

, priced to a perfect 113 earnings, and always-expensive

Agile Software

(AGIL)

, trading at 84 times that period's estimated earnings.

To be sure, as

Adam Lashinsky

has pointed out on

RealMoney.com

, Oracle is trading at just 38 times its projected 12-month earnings through November. Of course, to keep its metrics in line, it will have to make its May quarter numbers, something that could be a stretch.

Analysts who are uncomfortable with these run-ups don't see any justification for them other than an oh-so-90s urge among investors to just own tech stocks. That could come back to haunt them.

"We've simply got a crazy rally here," says Doug Augenthaler, an analyst with

CIBC World Markets

. "Things are getting kind of insane again."

"People are expecting a quick turnaround, like this is a one- or two-quarter thing," says Jon Ekoniak, B2B analyst at

U.S. Bancorp Piper Jaffray

. "I don't think this is a quick turnaround. I don't think the worst is over. There's more bad news to come."

That bad news could hit about four weeks from now. One lesson that software investors can take away from the first quarter is that software giant Oracle has an outsized effect on the rest of the sector. After the company warned at the beginning of March that it would not meet fiscal third-quarter numbers and that visibility was dim, other software stocks started getting whacked. When those companies started reporting their own numbers, Oracle proved itself to be just that: Everyone else claimed to have zero visibility, too.

Now, with valuations high again, some observers are worried that Oracle could pull a repeat, warning in early June that it won't make fiscal fourth-quarter numbers, and sending other software stocks reeling again. It sure hasn't said

anything to make people think differently.

"You've got to think, if Oracle isn't selling software, is Ariba? Is Commerce One? Probably not," says Lehman's Walravens, who has a market-perform rating on both Ariba and Commerce One. (His firm hasn't done underwriting for either company.)

There is at least one plausible explanation for the recent run-up in some names. Basically, they're cheaper now than they were, and over the long term, probably will move up higher than they are now. And the

Fed's

actions can't be disregarded, either.

"I think we get to a point with some of these valuations where people say, 'I'm not really concerned with how Oracle is going to do in their fourth quarter' " says Mark Verbeck, an analyst with

Epoch Partners

. "Investors will come around and say, 'Oracle's business is going to rebound with the economy, and I believe that the economy will eventually rebound with the Fed rate cuts. So, I'm not sure when Oracle is going to hit bottom -- this quarter, next quarter, whenever -- but long term, the valuation looks attractive."

Of course, one of the laments of the technology bubble is that it has made long-term investors out of many people who are still holding stocks they thought just

had

to go higher. If only they knew then what we all know now.