Source: Greta Ceresini via Flickr.

Next to hot dogs and apple pie there are few things that more aptly represent Americana than Harley-Davidson (NYSE:HOG) motorcycles. Harleys are a multigenerational American icon symbolic of the freedom of the open road and the individuality of each rider.

For decades, Harley-Davidson motorcycles practically sold themselves based on their name recognition and heritage. Between 1986 and 2006, for example, company motorcycle shipments increased every year, from just 36,735 units to 349,196 units (and keep in mind there were two U.S. recessions over that time span). That's a compounded growth rate of 11.9% per year!

Since 2006, however, Harley's motorcycle sales have hit a snag. As you can see below, unit shipments are beginning to rebound, but 2013's total of motorcycles shipped still sits below the number of bikes sold in 2002.

Source: Harley-Davidson. Figures include domestic and international markets but exclude any Buell brand sales between 1994 and 2011.

This raises the question: What's happened to Harley-Davidson, both this year to cause its stock to fall 8%, and in the big picture?

Let's take a closer look.

Why Harley-Davidson stock has sputtered in 2014
First and foremost, investors have put their kickstands down this year due to a combination of poor weather, the wait for new, lighter-weight Harley models, and disappointing guidance.

For its second quarter, Harley-Davidson announced that revenue grew by nearly 12% to $2 billion despite retail motorcycle sales coming in essentially flat year over year (90,218 sold in second-quarter 2014 versus 90,193 sold in second-quarter 2013). Profit for the quarter also rose 34% on an adjusted basis to $1.62 per share. Sounds good, right?

However, if you dig a bit deeper, Harley-Davidson CEO Keith Wandell pointed out that "prolonged poor weather across parts of the U.S. and soft Sportster motorcycle sales ahead of the highly anticipated arrival of Street motorcycles in dealer showrooms" caused Harley to miss the mark on sales in the U.S. for the quarter.

Furthermore, the company reduced its full-year production forecast to a growth range of 3.5% to 5.5%, or 270,000-275,000 motorcycles, down from its original shipment guidance of 279,000-284,000 bikes. As you might imagine, this didn't sit well with investors, who were once again becoming accustomed to consistent growth from Harley-Davidson.

The bigger-picture challenges facing Harley-DavidsonHarley's woes since 2006 can't solely be blamed on weather, of course. There are a couple of larger challenges looming that threaten the company's long-term growth prospects.

To start with, Harley-Davidson faces stiff competition from the likes of Honda and Suzuki outside the U.S., and competition from Polaris (NYSE:PII), the maker of Victory and Indian motorcycles within the U.S.

A New Delhi, India, street crowded with motorcycles. Source: Scott Anderson via Flickr.

The U.S. has always been Harley-Davidson's bread-and-butter market, and that remains true today. In 2013, 64% of its 260,471 bikes were shipped to dealers in the United States. But in 2006, Harley's best year on record, the U.S. accounted for 78% of total shipments. However, within the U.S., at least as of the end of 2013, Polaris was slowly chipping away at Harley-Davidson's market share, pushing it from 55.26% in Q3 2013 down to 54.9% as of Q4 2013. The culprit, according to Forbes, appears to be highly competitive pricing for comparable models, which are pushing cost-conscious riders toward Polaris' dynamic duo of Victory and Indian and away from Harley-Davidson.

We're also seeing tough competition in overseas markets, especially Asia. Motorcycle manufacturers love this region for its growth potential because a lack of proper infrastructure and/or vehicle pricing in emerging markets makes bikes and scooters popular choices for consumers. But Harley-Davidson is at a natural disadvantage to some of its peers like Honda due to its peers' significantly wider selection of bikes, which can hit multiple price points that Harley just can't compete with. Even focusing on a more affluent customer overseas can be tough since the history and connection behind the Harley-Davidson brand, which many Americans love, can be difficult to translate into an emotional attachment for overseas customers. 

There's one problem here: Harley-Davidson never designed its bikes to be cost-competitive. Harleys are inherently a pricier bike because the company relies on the quality of build and its riding history forged in the U.S. to drive sales. Cheapening that image in foreign markets could send the wrong message to its faithful U.S. customers. In addition, smaller-engine motorcycles and scooters from Honda and Suzuki make it practically impossible for Harley-Davidson to compete on price alone.

Finally, simple geography comes into play here. With Asia being one of the top markets for motorcycle and scooter buyers, Honda, Suzuki, and Bajaj Auto are all perfectly set up for success since they build in the region. Harley-Davidson did announce last year its intent to begin building some of its lighter-weight Street 750 and Street 500 bikes in India, marking the first time in its history that select bikes will be completely built outside the U.S. Then again, this is just one step for Harley. It would have a metaphorical mile to walk before it closed the production gap with peers that are geographically situated for success in Asia.

The other major challenge for Harley-Davidson is how to remain a multigenerational brand. What matters for younger and middle-aged adults looking to buy a motorcycle today may be markedly different than what mattered to their parents. This means Harley-Davidson needs to be responsive enough to understand what these newer generations of potential riders care about, and to adjust its product line to match those needs.

2015 XG750 Street. Source: Harley-Davidson.

We've already witnessed a bit of this production fluidity through the lighter-weight Street 750 and 500 models, and Harley's introduction in June of a prototype all-electric motorcycle known as LiveWire. The bike's projected riding range of 53 miles and lack of authentic gas-burning-engine gurgling sounds may not thrill some Harley faithful; however, an electric motorcycle could resonate with today's younger generation, which strongly believes in "going green." There's no guarantee this bike will make it into production -- the company is using the next year to gauge interest from riders across North America and Europe -- but it's a dynamic step for the usually stoic Harley-Davidson. 

Can Harley-Davidson break free from its funk?
Harley-Davidson stock might be down 8% for the year, and its modest production growth guidance might have given investors indigestion, but I still see a solid future ahead for the company as long as it continues to rely on its core customers and heritage.

Source: Bruno Caimi via Flickr.

While I think it's a smart move to open a factory in India to begin addressing attractive growth potential in foreign markets,  especially in Asia, I believe the key to Harley-Davidson's success will be in not cheapening its brand image. Let's face it: Harley-Davidson is never going to make scooters or 100cc-engine bikes, so it has no chance of competing with Honda, Suzuki, Bajaj Auto, and others based on volume. Harleys are geared toward  more affluent customers and those who want their bikes customized, so the more it focuses on this group, the better it'll do.

Investors in Harley-Davidson stock probably should adjust their long-term growth projections to somewhere around the middle single digits, rather than looking for a return of that 11.9% growth rate it experienced between 1986 and 2006. But I believe there could be long-term value in its shares.

Sean Williams is short shares of Tesla Motors, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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