Harley-Davidson (NYSE:HOG) returned to profitability in the second quarter as motorcycle revenue more than doubled from last year, but the market is worried inflation, higher raw materials costs, and lingering global supply chain issues will hamper the motorcycle maker's continued growth.

 Harley's performance, though, shows CEO Jochen Zeitz plans to create a smaller, more narrowly focused company -- one that is both profitable and on the right track.

Motorcycle riders on Halrey LiveWire One bikes.

Image source: Harley-Davidson.

Bike buyers are back

Harley reported consolidated revenue rose 77% to $1.5 billion, generating net income of $206 million, or $1.33 per share. This marked a turnaround from last year's pandemic-tossed second quarter that saw losses of $92 million, or $0.60 per share, on revenue that plunged to $669 million.

Still, while the bottom line far exceeded Wall Street's $1.21 per-share estimate, motorcycle segment sales of $1.33 billion, which includes motorcycles and related products, fell short of analyst expectations of $1.4 billion even as.

While motorcycle revenue alone hit $1 billion, a 130% year-over-year gain, unit sales were up just 24% to 65,000 motorcycles as Zeitz focused on Harley's more profitable bikes. Analysts are worried it is going full-bore into being a luxury brand again, giving up future sales potential at the expense of current profitability since earlier this year, Harley-Davidson officially discontinued the Street 500 and 750 models, as well as the Street Rod. 

Keeping focused on what makes money

When introduced in 2013, the Street bikes were Harley's first lightweight bikes in decades and were designed for the bike maker's more diverse customer base.   Because they were also its least expensive models, starting under $7,000, they served as Harley's entry level bikes for new riders, which is why they are used in its riding academy classes. 

Yet they didn't carry the same profit margins as their bigger brethren, and in a revamped motorcycle lineup, they were expendable. Analysts are concerned that Harley is giving up on reaching out to younger riders. It may make more money now selling bigger bikes to older customers, but that was what  led Harley-Davidson into six straight years of falling sales.

Electric motorcycles could change that.

Electric is the future

The LiveWire electric motorcycle is what will be the company's new outreach bike. It was originally launched as just another model in Harley's motorcycle lineup. But the bike maker has chosen to cast it as its own brand, separate from Harley-Davidson. It has its own dedicated showrooms and virtual headquarter hubs in Silicon Valley and Milwaukee, and it just released the latest model, the LiveWire One, that is more affordably priced than the original.

Currently, there isn't much hard data on LiveWire sales, though analysts estimate they're likely in the hundreds rather than the thousands of units sold. But Harley could have a winner on its hands with the direction it's taking with the electric motorcycle.

The company is still going up against some tough competition. Zero Motorcycles is the leading name in the industry, but rivals like Energica offer electric motorcycles with longer range and a full spectrum of charging options, and they're competitively priced.

The LiveWire One, though, is so far limited to just 12 dealerships in California, New York, and Texas, so we're not likely to see them everywhere for the time being. Nevertheless,  it's a much better entry point for Harley than the original LiveWire  priced at $30,000.

Turbulence just up ahead

Like the auto industry, Harley-Davidson has to contend with chip shortages and supply chain bottlenecks that exacerbate an already-tight inventory situation. 

Harkening back to the days when demand far exceeded supply and buyers would wait months for new models, Zeitz told analysts on Harley's earnings conference call:

We would have liked [inventory] to be higher, but due to the situation that is particularly supply chain related that was impossible and we don't anticipate that happening in the second half either because we're going to sell what we make essentially.

Harley also raised prices on its bikes to offset rising raw materials costs and the lingering impact of tariffs on its motorcycles, which could further impact future sales.

Used bike sales have also been a thorn in Harley's side, but adopting the "if you can't beat 'em, join 'em" mentality, it just launched H-D1 Marketplace, an online classifieds platform for used Harley-Davidsons -- a platform with a difference: The customer is buying from Harley dealers not from individual bike owners.  

Buyers will also be able to use Harley's financing services to finance the cost of the used bike, something buyers can't do with private party transactions.  Having its own financing services makes Harley a one-stop shop for all things Harley-Davidson.

An attractive entry point

The earnings report may not be the rip-snorting news investors would prefer since it indicates a number of headwinds coming down the road. But Harley-Davidson still looks to be in a much better position than it was even before the pandemic hit.

Harley-Davidson is a discounted stock. At under 12 times earnings estimates, a fraction of its estimated earnings growth rate, and just five times the free cash flow the motorcycle maker produces, the bike maker's stock could still roar ahead from here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.