(FORTUNE Magazine) – Technology investing is nothing if not a high-wire act. But recent price swings have everyone wondering whether the group will land on its feet or its back. To get some answers, FORTUNE's Richard Hylton interviewed two top-flight technology investors. Nick Moore co-manages the Franklin California Growth Fund, which enjoyed a hefty 41% return last year. Roger Honour, a senior portfolio manager for Montgomery Asset Management, runs the Montgomery Growth Fund, which delivered a 23.6% total return last year. That was below the S&P 500's return, but his fund was partly weighed down by an embarrassment of riches: Assets tripled to the current $856 million, leaving Honour scrambling to find places to park his truckloads of cash. The two have different views of the Internet, but they agree that some tech stocks are just too hot to handle.

What are the most exciting trends developing now in the technology sector?

R.H.: If you define exciting as what is on people's minds, then clearly one area is the Internet. But it's important that individual investors realize that it's not enough to find a good company and understand its business--they also have to know exactly what they're paying for. If the price the market demands at any point in time doesn't make sense, it's essential to have the patience to wait for the right price. For example, the Internet at the end of last December and the Internet today have the same growth potential, but Internet-related stocks are probably down 65% since then because last year people were so caught up in hype that they were willing to pay anything for the stocks, and a lot of it didn't represent good value.

Should investors pounce on the Internet stocks now that they've come down in price?

N.M.: We're still waiting for most of them to turn into businesses. Many of these companies are unanalyzable. You have to have customers, for example, and many of these companies really don't yet. However, that said, I do own some of them now--not pure-play Internet stocks, but the companies that provide the tools for distribution over the Internet. We look at the entire value chain and try to find the common denominator. For example, we made a lot of money buying Sun Microsystems, which sells servers and has benefited tremendously from the Internet. We probably got out of it too soon, but it made an awful lot of money for us in its run-up. Another great buy in the Internet infrastructure is Cisco Systems, which we feel comfortable owning. It's currently showing nearly 80% revenue growth year on year, which is remarkable for a company with several billion dollars in revenues annually. It speaks very well of the networking business that a leader this big can keep growing at that rate.

What's the broad outlook for tech stocks?

N.M.: You have to understand that there is only so much adrenaline in the world to carry tech stocks. Anyone with an eye on value at some point will say that some of these stocks are trading at levels that don't make sense. There are companies where I just don't trust the economic model, like Netscape, Yahoo!, and Secured Computing. You have growth, but I'm not sure about the economic bottom line in the long run. I don't see what will stop other companies from offering similar products. Look at Netscape--it's true they are very innovative, but there are plenty of companies that can write software. The most successful companies on the Internet have been in business only two years, so how high can the barriers to entry be? Having said that, I share the optimism about the Internet that's embedded in these prices. I think it's going to get a lot bigger.

Roger, what about you? Are you an Internet-stock buyer now?

R.H.: We bought Netcom On-Line after the stock came down from $100 a share a few months ago to $25. The company has been public for six quarters, and it has grown its subscriber base at nearly 200% for every one of those six quarters. At $25, the company has about a $250 million market capitalization. It also has $140 million in cash, or about $14.50 a share, which it raised through a secondary stock offering. The valuation is very compelling at this price.

Are expectations for the Internet too high?

N.M.: If you think about companies connecting to customers--that is what the Internet is really all about. It's a messaging environment that opens up a vast customer-service opportunity. But we're in the pioneering days of that technology. And we haven't really begun to connect people to people. I saw a statistic recently that sometime last August E-mail actually crossed the line and became bigger than first-class mail. You can tell we're just at the beginning of the curve because first-class mail hasn't started shrinking yet.

Nonetheless, you're being cautious. Have we entered a negative environment for technology investing?

R.H.: What I'm saying is that making money in these stocks in 1996 is not going to be anywhere near as easy as it was in the first seven months of 1995. I'm not characterizing the sector as going from good to bad, but we're going to see growth for some companies move from overtly positive to a regular pace.

N.M.: I think we went from overt pessimism in 1994 to overt optimism, and now we have reverted to what tech investors would call normal valuation in the market--at least using the last six or seven years as the basis for normal--but there's a lot of subtlety to what a value is in the different parts of the technology universe. One way you can buy value is to find unwarranted swan dives, or what I call good company, bad quarter. Another way is to buy emerging growth--businesses just hitting their vertical ascent. Sometimes those companies are expensive. This is where tech investors have more tolerance for high price, but because they're discounting back an enormous number in terms of earnings opportunity, what looks expensive may not be. Companies that fall into that group include Shiva Technologies, which makes remote-access products and is currently growing at about 60% a year. It now trades at about $90, or 50 times expected 1997 earnings. Another example is Remedy Corp., which makes software used by corporate info-services departments. Remedy Corp. is growing at about 100% annually and currently selling for about $60 a share, or 60 times expected 1997 earnings.

What is the outlook for telecom stocks?

R.H.: Telecommunications equipment is one of the more resilient areas, especially where it's heavily weighted toward wireless communication. The penetration of wireless is still fairly low, and on a worldwide scope it's a theme with a lot of legs. Some of the companies I would point to in telecommunications equipment are Northern Telecom, Ericsson, Nokia, and Lucent Technologies, the recent AT&T spinoff. The underwriters did a good job pricing Lucent, since they brought it out at a 10% discount to its competitors--which the stock immediately made up. Relational databases [those that are very flexible in storing and retrieving complex data] and networking are two other strong areas. In the relational database area, I like Oracle and Informix--which are both leading players--as well as Sybase. In networking, I'd look at Cisco Systems, Cascade, and Ascend Communications.

Nick, what do you think some of the resilient areas are?

N.M.: I certainly agree that you want to buy into the relational database area, and Informix and Oracle are excellent ways to get in. But I think the most important long-term theme is the rapidly escalating capital intensity of service industries. In other words, you can get bodies out of companies by substituting computers for them today. That is going to continue. How are we getting there? A lot has to do with the death of stand-alone computing. We are so early in the adoption of networking technology that I can barely articulate it. One thing that is already a big business is electronic data interchange--companies connecting to other companies. Sterling Commerce is one of the best-placed software companies in the electronic data interchange arena. It's building value at a rapid pace, and it's fairly priced.

Are you finding much value in the IPO market for technology companies these days?

N.M.: We don't look to the IPO market often for value but more for opportunities. One disconcerting thing about the IPO boom is that many companies are going public at values that are a multiple of their private market values. For example, RSA Data Securities, one of the best-positioned companies to benefit from the Internet because it develops encryption software, just sold itself in a private transaction for $200 million. Meanwhile, some Internet companies without any earnings are being valued at $500 million to $1 billion, prices they would never get from private investors in their industry. This premium in the market is a sign of growing speculation, and it tells me that we haven't hit bottom in the tech sector.