Consider the case where:
M1 and F1 are US citizens abroad
They have a child, M2. M2 is a considered a "natural born citizen."
M2 never leaves that foreign nation.
M2 has a child with F2 (a US citizen abroad): M3.

M3 is not a US citizen as his M2 was never resident in the United States.

In the context of the Act, it seems like that clause is to prevent a chain of "natural born citizens" who never stepped foot in the US. It doesn't block citizenship by other avenues, it limits the naturalization act itself.

Consider the case where:
M1 and F1 are US citizens abroad
They have a child, M2. M2 is a considered a "natural born citizen."
M2 never leaves that foreign nation.
M2 has a child with F2 (a US citizen), also abroad: M3.

M3 is not a US citizen as his M2 was never resident in the United States.

In the context of the Act, it seems like that clause is to prevent a chain of "natural born citizens" who never stepped foot in the US. It doesn't block citizenship by other avenues, it limits the naturalization act itself.

Consider the case where:
M1 and F1 are US citizens abroad
They have a child, M2. M2 is a considered a "natural born citizen."
M2 never steps foot in the US.
M2 has a child with F2 (a US citizen), also abroad: M3.

M3 is not a US citizen as his father was never resident in the United States.

In the context of the Act, it seems like that clause is to prevent a chain of "natural born citizens" who never stepped foot in the US. It doesn't block citizenship by other avenues, it limits the naturalization act itself.