Last Friday, educational software provider Blackboard (NASDAQ:BBBB) had the second-most successful technology IPO this year, rising 43% on its first day of trading. Such enthusiasm begs the question of whether Blackboard is the next eBay (NASDAQ:EBAY) or (NYSE:AMZN), which followed leaps in their first few days of trading with even better long-term performance.

Blackboard's software addresses two educational markets. Its Academic Suite helps instructors create and manage Web-based course materials while its Commerce Suite supports campus-related transactions, such as meal planning administration and textbook purchasing. These businesses have some attractive attributes.

Web-based learning software is now considered critical at most educational institutions. The software is valuable not only to improve instruction, but also to provide a competitive advantage when recruiting students. Online software is also particularly suited for distance education. This is noteworthy because distance-education courses are run at a profit at many colleges, unlike classroom courses. Thus, software that can improve distance education and potentially increase profits holds considerable appeal to this market.

Another great characteristic of the business is that there are significant costs to switching from one software package to another. Faculty and system administrators have to learn how to use and maintain the new system. Then, all content that was generated for the previous system, including syllabi, documents, assignments, and test questions, would have to be migrated to the new system. Since such a migration is typically a complicated and tedious task, customers have considerable motivation to stick with a given solution. Consequently, Blackboard has a nice moat against competitors and the potential to raise prices as the product becomes indispensable to customers.

Despite its appeals, there are several reasons to be cautious of Blackboard, though. First, it has a strong competitor in WebCT. The privately owned company is roughly the same size as Blackboard, and the same moat that discourages customers from leaving Blackboard will hinder Blackboard's efforts to poach customers from WebCT.

Second, Blackboard's primary customers, colleges, are, overall, quite poor compared to corporations. This makes it more difficult to expand the market and generate incremental revenue by selling expensive add-ons. Companies that have done well in the educational space, like the Apollo Group (NASDAQ:APOL), have succeeded by focusing on private education, but this is only a fraction of Blackboard's market. Students, a potential secondary market, are also poor and unlikely to pay up. Yet neither Blackboard nor WebCT have been able to sell to the more lucrative corporate space.

A third cause for wariness is valuation. On an earnings basis, Blackboard's about break-even, so it's necessary to look at other metrics. Free cash flow is one of the primary criteria that Tom Gardner uses to select stocks in his Hidden Gems newsletter, and at a multiple in the mid-30s, Blackboard doesn't make the grade. Blackboard's 5.5 price-to-sales ratio is close to Oracle's (NASDAQ:ORCL) 5.7 and less than Microsoft's (NASDAQ:MSFT) 8.6, but seems expensive compared to the software industry's average of 2.

Investors might be hoping that Blackboard grows into its relatively high valuation, or they're simply valuing it in line with other pricey higher education stocks. However, at this price, potential investors should be careful, lest they be taught a lesson about the risks of expensive IPOs.

Fool contributor Richard Gibbons does not own any securities mentioned in this report.