In the third quarter of 2020, Beyond Meat (NASDAQ:BYND) reported revenue growth of 3% year over year -- it's slowest growth as a public company by far.

Slow revenue growth is problematic for Beyond Meat shareholders for two reasons. First, the stock has a rich valuation. Consider it currently trades around 19 times trailing sales, compared to 0.5 times sales for a company like Tyson Foods. If revenue growth slows, a premium valuation isn't justified -- at least not this high. After all, it could get cut in half and still have a premium valuation.

Second, plant-based meat is a growing industry. According to a report from Research and Markets, revenue for plant-based meats is expected to grow at an 18% compound annual growth rate (CAGR) between 2019 and 2025, reaching $12 billion in revenue during that time. If 18% growth is the industry benchmark, Beyond Meat's 3% growth isn't going to cut the mustard. It could be a signal it's losing market share to competitors.

However, diving deeper into Beyond Meat's Q3 results, there's reason not to get too worked up about the company's lackluster growth. While there's valid concerns from the quarter, there's also encouraging things going on beneath the surface.

A woman holds a Beyond Meat burger with all the fixings.

Image source: Beyond Meat.

Where'd all the growth go?

In Q3, Beyond Meat's revenue was $94 million -- up just 2.7% year over year. For perspective, full-year 2019 revenue was up a blistering 239% compared to 2018. And in the second quarter, it reported 69% year-over-year revenue growth. With this context, lack of revenue growth in Q3 was troubling indeed.

Beyond Meat divides its revenue into two categories: revenue generated from retail outlets like grocery stores and revenue generated from foodservice outlets like restaurants and casinos. Retail-segment revenue increased 39% during Q3 compared to the third quarter last year. By contrast, foodservice-segment revenue plummeted 41%.

If there's been any recovery in the restaurant industry, it's been at fast-food chains. But fast-food restaurant partners only account for about 33% of Beyond Meat's foodservice revenue; the rest relies on restaurants with a dining room. This dynamic understandably pressures the company's foodservice sales, and its results reflect this. Therefore, it's tempting to blame Beyond Meat's woes entirely on the foodservice sector.

However, foodservice-segment sales were even worse in the second quarter for Beyond Meat. In Q2, the company's foodservice revenue fell 59% from the prior year. Nevertheless, it reported strong overall growth thanks to resilient retail sales. Q2 retail sales were up a stunning 192% year over year.

In summary, Beyond Meat's foodservice revenue looked bad in Q3, but it was actually much improved from the prior quarter. Conversely, while the company's retail revenue looked OK, its growth rapidly decelerated from the blistering pace set just one quarter ago. Therefore, to me, it seems the real culprit for Beyond Meat's lackluster Q3 performance was retail, not foodservice.

A surprised man puts his hand on his head while looking at his computer screen.

Image source: Getty Images.

Beyond Meat's complex retail situation

It's not easy to contextualize Beyond Meat's Q3 retail revenue. Management attributed the decline to a phenomenon known as "pantry packing." In the early days of the pandemic, consumers packed their pantries and freezers due to the uncertainty from the coronavirus. Therefore, sales were abnormally high in Q2. But once freezers were full, sales in Q3 slowed down.

Here's why investors should be concerned about this explanation. While 192% growth in Q2 retail sales was great, it wasn't that much improved from growth in 2019. In 2019, retail sales were up 185% from 2018. If lackluster sales in Q3 is explained by pantry packing in Q2, then one must concede Q2 retail-sales growth would have decelerated significantly from 2019 if not for a one-time phenomenon. So either way, retail growth is trending down.

Retail was 74% of Beyond Meat's business through the first three quarters of 2020. If growth keeps slowing down from here, the premium valuation afforded a growth stock could evaporate and lead to weak returns for shareholders going forward.

Long-term investors should focus on the growth of plant-based meats and specifically Beyond Meat in the category. Much of the company's retail growth in 2019 was from filling new distribution channels. Distribution is crucial, but it doesn't address the outstanding question about end-consumer adoption.

To that end, there's encouraging news. In Q3, Beyond Meat's retail volume was up 46% year over year, outpacing the 41% growth for the plant-based category as a whole. The company is intentionally trying to lower its prices to undercut the price of animal protein someday, and its price per pound was down 8% from last year. This negatively impacts revenue growth, but shows the company's products are still being adopted at an impressive rate and outpacing category growth to gain market share. That's good reason to believe Beyond Meat's growth story isn't over yet.

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.