Shares of Palantir (PLTR 6.89%) are surging on Thursday. The company's stock gained 6.5% as of 3:40 p.m. ET. The S&P 500 was up by 1.7% while the Nasdaq Composite's had jumped 2.3% higher.

The AI pioneer and government contractor announced a strategic partnership with Google Cloud to enhance its federal government offerings.

A key partnership

Palantir and Google parent Alphabet announced a new partnership that will see the Google Cloud services integrated into Palantir's FedStart platform. The move will help deliver advanced AI solutions to U.S. government agencies. FedStart, Palantir's initiative designed to streamline software deployment for government entities, helps technology companies and start-ups offer their software solutions to the federal government more efficiently. This partnership will boost the program's capabilities by combining Google's robust cloud infrastructure with Palantir's expertise and compliance know-how.

The move will help Palantir's platform scale and provide a more complete ecosystem for its government clients. The comprehensive approach could help Palantir win larger contracts and more of them. These contracts are the bread and butter of Palantir's business. Investors reacted positively to the news, sending share prices significantly higher.

Palantir still has a valuation issue

Even after a 15% decline from its peak a few months ago, shares of Palantir are trading at untenable valuation multiples. Its price-to-earnings ratio is nearly 570. That is absurdly high. There is no doubt that Palantir is executing at a very high level, and the new partnership could help it win more business, but a valuation like that requires a level of perfection from the company that I doubt it can maintain.