Tesla Inc. TSLA -4.15% is valued as though it will soon conquer the U.S. auto market. Now, it has the small task of actually doing so.

Tesla shares have been unstoppable ahead of the Model 3 launch, having gained 40% this year. The upstart auto maker is more valuable than Ford F 3.70% and slightly less valuable than General Motors GM 0.41% on a market cap basis. The crux of the excitement is the all-electric Model 3 sedan that Tesla says will start at $35,000. Production is scheduled to begin this summer.

Tesla now trades at 271 times projected 2018 adjusted earnings, according to FactSet. Ford and GM, in contrast, trade at less than seven and six times the 2018 estimate, respectively. Tesla gets that valuation because it is expected to upend the auto industry, while earning big profits that would bring down the multiple.

But to actually earn enough profits to reduce Tesla’s multiple to something in the realm of reasonable would require almost heroic assumptions. First, the basics: Say Tesla’s valuation should be 10 times higher than GM and Ford’s, and say Tesla’s share price stays constant at about $300. That means Tesla would need to earn $4.29 a share in 2018, which equals $700 million in total net income, assuming the current share count doesn’t change. For perspective, Tesla sold about 76,000 cars in 2016 and lost $675 million on sales of $7 billion. Now the assumptions: CEO Elon Musk forecasts Tesla can produce 500,000 cars in 2018, while analysts, a bullish lot, peg the number of deliveries at 302,000. Let’s say the delivery number is 380,000. Pencil in an average selling price of $50,000—Tesla will still be selling high-priced Model S and Model X vehicles along with the Model 3. That scenario yields just under $21 billion in automotive revenue. Add another $2 billion in sales from its residential solar and energy businesses. Tesla has never generated a positive operating margin for a full year, but assume it gets savings on battery costs and realizes economies of scale. If Tesla gets the same 5.4% operating margin that GM and Ford averaged last year, it would generate operating income of $1.1 billion. Subtract $200 million for interest expense and tax the remainder at 25%: The result is $700 million in net income, giving Tesla a multiple roughly 10 times bigger than GM and Ford. Get financial insights and commentary on global investing from The Wall Street Journal’s Heard on the Street team. Subscribe to the podcast. To get there, the company would have to quintuple the number of cars it sells, earn margins equivalent to those of its highly efficient competitors and not sell new shares. Tweak any of these variables—lower sales, lower margin, lower selling price—and Tesla doesn’t come close to earning enough to get to 10 times the multiple of its bigger rivals by the end of 2018. Valuation has never mattered before for Tesla’s investors and it may not matter at the end of next year. Shareholders may be willing to wait five years instead of two for Tesla to generate big profits, or they may continue to figure that valuation doesn’t matter for a game-changer like Tesla. Tesla’s cars have always outshone its financials. That needs to change soon for its valuation to make sense. Write to Charley Grant at charles.grant@wsj.com

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