Since the peak, the market capitalization of the global technology universe has dropped 73 percent, from $7.4 trillion to roughly $2.0 trillion. Back then, there were 122 companies with market caps above $10 billion. Today there are only 35.

Business is wretched, earnings estimates are still too high, and signs of a turnaround are few. Surely all this bad news has been priced into stocks, right? Tech is cheap, right? Time to buy, right? Well . . . no. The market just isn't smart enough to price in all of our problems.

Consider that in July, one could have made a decent the-valuation-looks-compelling argument regarding most of tech. But if you'd bought then, by late October you'd have been down another 65 percent in Lucent Technologies, 55 percent in Nortel Networks, and 45 percent in EMC or Sun Microsystems (NYSE: LU, NT, EMC; Nasdaq: SUNW). There's no reason to think that argument would work any better now.

So, having done my best to shoot holes in the idea of buying tech stocks based strictly on valuation, I'm going to dedicate the rest of this discussion to--you guessed it--valuation. Specifically, I'll discuss an inverted discounted cash flow (iDCF) sensitivity analysis, which is helpful when wrestling with the age-old question, Is this stock cheap or expensive?

But first, a maxim: business fundamentals condition valuation. Valuation is useless in and of itself. Fundamentals need to be considered, especially for technology, because operating-model sensitivity is so outrageous.

Essentially, valuation should be used as a reality check. It helps when you think you've found a company with fundamentals moving in the right direction, but are still wondering whether you're the last one to figure out that it's a good story.

An iDCF sensitivity analysis is used to determine the medium-term revenue growth rate a company needs in order to justify its current share price, based on different assumptions about its future operating margins and discount rates. The lower the implied growth rate, the better--less growth has been "priced in" to the stock.

The sensitivity analysis comes into play because, while in theory a DCF model should adequately capture the present value of a company, in reality the results involve massive sensitivities, especially with the denominator--the discount rate, or a company's weighted average cost of capital (WACC). WACC is complex to calculate, and analysts often abuse it, since tweaking it just a little can get a premeditated result.

Using iDCF, tech as a whole appears neither expensive nor cheap. For instance, an iDCF sensitivity for Nokia suggests that, to justify its current price of €13.5, the company would have to achieve medium-term revenue growth of 1 to 10 percent, depending on whether you use a WACC of 10 or 12 percent--assuming Nokia keeps its operating margin in the range of 15 to 19 percent. If you think a 19 percent operating margin seems right and the discount rate is 10 percent, the implied growth rate to justify the price of €13.5 is just 1.3 percent.

But don't rush to buy a stock based on iDCF alone. Without fundamental support, you can lose conviction in the inputs. With downward revisions to operating margins and upward revisions to discount rates, implied growth rates can soar to unreasonable levels.

Still, it's okay to pay for a company with a relatively high implied growth rate if its fundamental story is intact. Dell Computer's (Nasdaq: DELL) implied medium-term growth rate of 5 to 14 percent, for example, is higher than Sun's, but I'd be more inclined to pay for Dell's higher implied growth because it is "making its own weather" by capturing more PC market share. Sun's implied growth rate is lower (below 0 percent, if it can get margins back to 7 percent), but it still seems unable to find a way around the secular demise it's facing in the enterprise hardware market. Which growth would you count on?

Pip Coburn is the global technology strategist with UBS Warburg and is the author of the "Weekly Global Tech Journey." He does not have a position in any of the securities mentioned in this article.