Shares of eHealth (NASDAQ:EHTH) surged 63% to $22.90 on its first day of trading Friday. Typical of such IPO success stories, however, individual investors weren't involved in the ride. Though the IPO was priced at $14, Reuters reports the stock opened for trading at $25.

Still, is the 63% surge an example of dot-com hype? Not really. The company is in a fast-growing market and has some strong barriers to entry. However, the valuation does look frothy.

Founded in 1997, eHealth is a portal for health insurance for individuals, families, and small businesses. On its website, users can analyze, compare, and purchase health insurance policies.

So far, the company is growing nicely. For the first six months of 2006, revenues were $27.2 million, up from last year's $19.2 million. Net income for this year is $2.6 million.

The market opportunity is massive. For example, about 17 million Americans purchase health insurance directly. And this segment is likely to grow because of a variety of factors, including new business formations, as well as layoffs and cuts in benefits from major companies. There are also 17 million uninsured people who have annual incomes of $50,000 or more.

Most importantly, eHealth has significant competitive advantages. Its database has more than 5,000 health insurance plans from more than 150 carriers, including Aetna (NYSE:AET), Humana (NYSE:HUM), and UnitedHealth (NYSE:UNH). The system has dynamic business logic that helps users effectively complete an application online. In fact, about 80% of applications are submitted without communication with customer reps.

The system also uses a sophisticated electronic processing interchange with carriers to allow online payments for policies. Keep in mind that a typical paper-based application requires about 44 days to approve, whereas an EPI approach takes half that long at most.

As for the business model, eHealth has mostly recurring revenues. That is, the company generates a commission from insurance carriers when policies are purchased. The commission continues -- on a monthly basis -- for the life of the policy. What's more, state regulations fix the amount of commissions. In other words, there is no discounting of commissions from competitors.

However, there is some customer concentration to worry about. For example, in 2005, about 17% of revenues came from UnitedHealth and 15% from WellPoint (NYSE:WLP). These agreements have clauses that allow for termination after 90 days.

But perhaps the biggest problem -- at least for investors -- is the typical issue for IPOs: valuation. Assuming eHealth generates $7 million in net income and $65 million in revenue for 2006, the company would be selling for 68 times earnings and eight times revenues. True, this is a strong growth business, but investors are definitely paying a very high premium for it.

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Fool contributor Tom Taulli does not own shares mentioned in this article. The Fool's disclosure policy goes well with an apple a day.