Megacompanies such as SAP (NYSE:SAP), Adobe (NASDAQ:ADBE), and Microsoft (NASDAQ:MSFT) are adopting Web-based software, and Wall Street is getting excited. Just take a look at yesterday's public offering of Constant Contact (NASDAQ:CTCT). Investors scrambled for shares of the on-demand operator, and the stock price surged 72% to $27.64.

Constant Contact provides email marketing services to more than 130,000 customers, mostly small businesses. Essentially, the company allows its clients to send email newsletters, updates, and marketing promotions to its customer base (i.e., email base). The revenue model is based on subscriptions, with the average customer paying about $33 per month.

To boost things, Constant Contact has added new products, including surveys and image hosting. The upshot has been a recurring revenue base. In fact, the company has cranked out 22 consecutive quarters of revenue growth.

However, it's not cheap to get customers. Constant Contact must buy search terms from Google (NASDAQ:GOOG) and Yahoo! (NASDAQ:YHOO), as well as share revenue with distribution partners that include VistaPrint and American Express (NYSE:AXP).

As a result, Constant Contact spends more than 60% of revenue on sales and marketing. But there's more. After all, the company shells out 23% of revenue on R&D. So it's no surprise that Constant Contact has been posting losses. For example, there was a net loss of $6 million for the first half of 2007.

Still, Constant Contact is trading at a much higher revenue multiple than is, which is a premier on-demand operator. So while I think Constant Contact has built a solid company, the valuation is too rich for my blood and looks out-of-whack for its sector -- where valuations are already frothy. For Foolish investors, having no contact is probably the best policy.

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