(MONEY Magazine) – Like irritable children trapped in the back of the family minivan on a cross-country drive, tech investors these days can't help but wonder: "Are we there yet?" They scour every bit of news from the beleaguered tech sector for clues about when the much anticipated tech recovery will begin in earnest.

That might be a waste of time. Perhaps a better question to ask is what this recovery will look like--and whether it can possibly live up to the still elevated expectations of investors who, with a combination of nostalgia and greed, long for the tech boom of the late 1990s. Are we in a cyclical trough, poised for another grand tech adventure? Or was the '90s boom a phenomenon not likely to be repeated, driven by the confluence of the Internet craze and last-minute Y2K preparations?

Signs, unfortunately, point increasingly to the latter. The telecom sector remains awash in overcapacity and debt. Companies that supplied the Great Internet Buildout are still struggling to replace bankrupt dotcom and telecom customers. Businesses and consumers are waiting longer to replace their PCs. And there's no clear catalyst for a dramatic increase in corporate information technology (IT) spending any time soon. The second-half recovery many analysts were predicting at the start of the year has been pushed into 2003, with a recovery in the telecom sector even further off.

THE BULL (HEADED) MARKET So why are so many investors still so overinvested--both literally and figuratively--in tech? Two years after the Nasdaq meltdown, you might expect burned tech investors to be sick of the subject. And some are. But many are nearly as obsessed today with the Ciscos and Intels and Suns of the world as they were two years ago. Consider trading volumes: Salomon Smith Barney strategist Tobias Levkovich notes that the tech sector accounts for only 4% of GDP, but tech stocks account for half the S&P 500 trading volume. And consider how eager investors were to jump back into tech this May after a passel of firms--most notably Cisco, Applied Materials and Dell--reported not-quite-terrible quarterly results. Cisco shot up a staggering 24% the day after the company posted earnings that--shades of the good old days--beat the Street by 2[cents] a share. Never mind that results were boosted by cost cutting and that revenue was actually lighter than expected. Never mind that Cisco--like virtually all technology firms--has about as much "visibility" going forward as a drunk in a fog. Techs were moving again and investors didn't want to be left behind.

Not-so-great expectations

Like so many suckers rallies before it, the May run petered out quickly. The most skeptical observers expect the Nasdaq to bump along the bottom for some time. Yet many tech stocks still sport valuations that are seriously out of whack with what is widely supposed to be our new age of diminished expectations. In a now legendary interview with BusinessWeek in April, Sun CEO Scott McNealy chided investors for paying 10 times sales for Sun stock back in the days of the boom. ("At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends," he said. "What were you thinking?") Sun has since sunk to less than two times sales (and a single-digit stock price). But there are still quite a few tech stocks sporting double-digit price-to-sales ratios, including Microsoft, PMC-Sierra and Yahoo.

Those expecting a sudden return to Nasdaq 5000 may not realize just how exceptional the tech boom years really were. We are, in fact, only beginning to recognize just how long it might take to return to those levels. Technology spending in the late 1990s was driven by what analyst Hugh Bishop of the Aberdeen Group calls "almost indiscriminate purchasing." How indiscriminate? U.S. companies wasted an estimated $130 billion on unnecessary technology over the past two years. And Morgan Stanley's Chuck Phillips notes that the software industry is still plagued with an excess of "shelfware"--software purchased but not yet installed. The corporate technology executives in Phillips' latest survey confessed that they'd bought 30% more database-software licenses than they needed. Meanwhile, lightly used Cisco routers and Sun servers can still be found on sale on eBay for a fraction of their sticker prices.

So what's a reasonable growth rate to expect over the next three to five years? With visibility in the tech world close to zero, all estimates are little more than guesses. But one thing is certain: We won't be returning to the double-digit growth rates of the last boom for years to come. The Aberdeen Group forecasts that U.S. IT spending will recover from its 2001 decline, growing a little over 4% this year. Over the next three years, Aberdeen expects spending to increase perhaps 5% to 6% annually. Forecasters at Gartner Dataquest, another research firm, are a little more optimistic. Gartner's George Shiffler suggests that growth will hit "high single digits" over the next three or four years, but he can't be much more specific--because Gartner's researchers are still revising their estimates downward.

The search for a new killer app to replace the Internet as a growth driver has so far been fruitless--leaving many of the biggest tech names grasping for new ideas. Cisco is looking to wireless and storage networking and something called voice-over-IP telephony (which offers, in theory, a cheap way to use Internet technology for phone systems). Microsoft has plunged into the highly competitive video-game business, selling Xboxes at a loss in hopes of making a killing on game software down the line. Intel, which showered $3.8 billion on research last year, is trying to set an example by spending its way to innovation. If that fails, it's also trying simple exhortation. At Intel's Developers Forum this February, CEO Craig Barrett desperately urged the crowd to come up with new stuff that would inspire companies and consumers to start writing checks again. "The only way out of a recession," he said, "is to bring out new products, new technology...and make the end user excited about what you have to offer."

Cheap shots

The lack of certainty about tech's future makes it nearly impossible to figure out how to value tech stocks accurately. The fact that a tech stock has plunged doesn't make it cheap. That's obvious when it comes to dotcom stocks with no business plan, or telecom upstarts with no real customers and lots of real debt. But it can be true even for companies with real products and real customers. Take business software stocks, which dropped dramatically this spring after leading names in the sector reported lousy first-quarter results. "Stock prices have come down," software analyst Richard Petersen of W.R. Hambrecht explains, "but earnings estimates have come down as well."

Consider Oracle, which has recently been trading at 22 times this year's estimated earnings, a far cry from the triple-digit P/E ratio it boasted at the height of the tech boom. Granted, the company was able to deliver $2.6 billion in profit last year--no small feat for a tech company. But its core database business faces stiffer competition from Microsoft and IBM, and the company's applications business--in theory, its big growth driver--has faltered. Oracle's most recent quarterly results were disappointing and analysts have been steadily lowering their estimates. "It's a great company with a great franchise and tons of cash," says Petersen. "But it's not growing. We don't see a lot of catalysts." Melissa Eisenstat at CIBC World Markets concurs, suggesting that Oracle's outlook is "bleak," with a recovery "at least a year away."

Other companies will have to struggle to recapture even a portion of their former glory. "Sun was one of the main beneficiaries of the dotcom era," notes David Bailey, a tech hardware analyst at brokerage Gerard Klauer Mattison. "That business for the most part is not coming back." Sun still counts many of the largest companies as its customers, but at the moment that's not doing Sun much good; the company is expected to see revenue fall more than 30% in its fiscal year ending this June. While the company is expected to return to profitability this quarter, a real recovery, say analysts, repeating their new favorite forecasting mantra, probably won't come until "sometime next year."

Beyond tech

Given all these uncertainties, it's impossible to justify the premium valuations that many big tech names still command. (Aren't we supposed to discount uncertainty?) Still, many investors refuse to sell even the most distressed tech names because they're afraid of missing out on what they expect will be a big rebound. "Tech captures the imagination, more so than talking about auto build rates," Salomon Smith Barney's Levkovich acknowledges. "And we don't know yet what the next big thing is going to be. Harking back to the last winners is pretty normal."

Normal? Yes. Sensible? Nope. As diehard tech investors wait for the big rebound, they've missed out on what A.G. Edwards chief equity strategist Stuart Freeman calls the "nontechnology bull market." In the six months that ended in mid-May, the S&P 500 was down 7% and the tech-heavy Nasdaq 100 was down more than 20%. But, Freeman notes, the nontech stocks in the S&P 500 have actually moved up about 12%.

Some years back, singer Courtney Love offered some diet tips to the readers of a little alternative zine called Rollerderby. Actually, it was just one tip. "No cheese," she told Rollerderby editor Lisa Carver. "That's it, Lisa. Period. No cheese. I swear to God, Lisa, don't eat cheese. There are a million things to eat that are not cheese."

A.G. Edwards' Freeman is not quite as fanatical in his advice as Love. He doesn't suggest that investors bail out of tech entirely because it isn't working at the moment--merely that they spread their bets a little, giving tech roughly the same weighting in their portfolios that it has in the S&P 500 (about 17%). To paraphrase Ms. Love: There are a million things to invest in that are not Cisco.