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Shares of Palantir Technologies (PLTR +13%) are on a blistering pace higher today, reaching levels not seen since early 2021 before the expiration of the company's IPO lockup period ignited a wave of selling. Inclusion in the S&P 500 announced on Friday after the close is setting the stock ablaze. Murmurings that the AI software developer could be on the S&P started after it delivered its second consecutive quarter of GAAP profitability in 1Q23 and remarked that profitability should persist over the next several quarters.

We have liked PLTR since late last year after it exhibited exceptional turnaround momentum by capitalizing on the AI buzz. However, with shares now at multi-year highs after more than doubling YTD, PLTR's valuation has swelled to frothy levels, trading at a 27x FY24 sales multiple, considerably higher than some of its peers, including Snowflake (SNOW) at 11x and IBM (IBM) at 3x.

• PLTR has steadily demonstrated its technological advantages in the field of AI, recently delivering another solid beat-and-raise in Q2. Government and commercial revenue maintained upward momentum, with commercial customers climbing by 41% yr/yr to 593. The commercial side of PLTR tends to be the major focus each quarter, given how the company already commands a dominant presence within the U.S. Government.
• PLTR has grown profitably, recently expanding its adjusted operating margins by 12 pts yr/yr to 37%, marking its seventh straight quarter of margin expansion. As a software-focused firm, PLTR has ample room to maintain its profitability.
• Europe has been a constant obstacle, weighing on international commercial growth, which comprised a relatively small 22% of total revs in Q2. Earlier this year, PLTR warned that headwinds in Europe may persist given that the region was heading toward 0% GDP growth over the next couple of years. However, to offset this challenge, PLTR has been moving swiftly into Asia and the Middle East, helping keep its international commercial revenue growth trending positively in Q2 at 15% yr/yr.

Overall, PLTR remains a solid long-term AI play. The company's software is differentiated from other AI-powered data analytic tools and has already penetrated global enterprises, including ExxonMobil (XOM) and United Airlines (UAL), not to mention the numerous government agencies, including the U.S. Federal Government. However, at current levels, we urge caution over the near term since any minor cracks can open PLTR up to a flood of selling. Following massive inflows of capital into the AI industry, customers will need to see a healthy return on investment soon. Even if PLTR continues to showcase its competitive edge, if the overall AI picture begins to deteriorate, PLTR will likely be swept up in the selling pressure, especially given its current valuation.