Atlas Copco: Mission Critical Isn’t Optional

“Volatility is the price of admission. The prize inside are superior long-term returns. You must pay the price to get the returns.”

– Morgan Housel, author of Psychology of Money

arvy’s teaser: An industrial powerhouse built on mission-critical tools, pricing power, and recurring revenue. Atlas Copco proves that specialization and discipline — not hype — drive world-class returns. Volatility may sting, but the compounding is undeniable.

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Mission critical.

Whenever you hear that term, pay close attention — especially as an investor.

From a business standpoint, supplying a mission critical product means one key advantage: your customer isn’t price sensitive. Think about it — if there’s a product or piece of software you absolutely need to keep your operations running, you’ll buy it. Whatever it costs.

The beauty? These products usually make up a small fraction of your total cost base, so you don’t think twice. But if they’re too expensive or too broad, competition creeps in — and margins vanish. That’s why the most attractive mission critical businesses tend to operate in niche markets, with high barriers and little room for substitutes.

There’s one Swedish company that’s mastered this game in the industrial space.

Atlas Copco.

Chart 1: Atlas Copco Compressors

Source: Atlas Copco

Operate Only Where You Have an Edge

Atlas Copco is no ordinary industrial company.

It’s a sharply focused supplier of capital equipment, with a deliberate presence in niche segments where performance, precision, and reliability are non-negotiable. Think of areas where failure isn’t an option – and where customers value innovation and uptime far more than a bargain price.

The strategy (chart 2)?

Operate only where its reputation for relentless innovation and uncompromising quality gives it an edge. Atlas Copco actively avoids commoditized markets, where price wars erode margins and brand value. Instead, it targets industrial and scientific applications where its products are considered mission-critical – and where it can either lead or win.

Its business is organized into four core segments:

• Compressor Technique (46% of sales): Focused on industrial air and gas solutions. With energy efficiency becoming a top priority globally, this segment is positioned right at the heart of that trend.
• Vacuum Technique (23%): Supplying cutting-edge vacuum solutions for high-tech industries. This segment is a key enabler of the digital age – supporting the miniaturization and complexity of electronics manufacturing, especially in semiconductors.
• Industrial Technique (17%): Supporting automation and quality in manufacturing. Think of it as the muscle behind productivity, enabling smarter, more flexible factories.
• Power Technique (14%): Delivering portable energy and storage solutions. As industries shift toward sustainability, Atlas Copco’s offering is evolving to meet those demands with safe, ergonomic, and efficient systems.

This ambitious approach, in which Atlas Copco holds industry-leading market shares, gives the company excellent access to important secular growth opportunities.

And that’s not all.

Chart 2: The strategy and business model to reach Atlas Copco’s targets

Source: Atlas Copco

Specialization Strategy

The company’s specialization strategy has two important consequences that are attractive to investors:

1. Pricing power & high returns on capital: By focusing on energy efficiency, productivity, and reliability, Atlas Copco earns the trust of customers who prioritize performance over price. That’s translated into wide profit margins and returns on invested capital consistently above 20% over the past decade.
2. Aftermarket dominance & cash flow generation: Because its products are mission-critical, Atlas Copco retains strong control over the aftermarket (35% of group sales) – servicing and spare parts. This segment is highly profitable and recurring. Combine that with an asset-light model (outsourcing ~75% of manufacturing costs), and you get strong, consistent free cash flow.

Taken together, these drivers form a resilient and diversified revenue engine (chart 3). It’s a rare industrial company that can boast compounding growth, wide economic moats, high returns on capital, and strong free cash flow — all wrapped in a conservative balance sheet and a culture of long-term value creation.

Atlas Copco doesn’t just sell products.

It embeds itself in the infrastructure of modern industry — and once it’s there, it’s hard to replace.

I know, sounds like a hell of a “Good Story”.

But of course, there is a catch.

Chart 3: Atlas Copco revenue and EBIT growth over the last three decades

Source: Quartr

Industrials = Cyclicals

Even though Atlas Copco generates 35% of its revenue from recurring sources like maintenance and aftermarket services, it’s still firmly rooted in the economic cycle.

A large chunk of its business — namely Compressor and Power Technique (together making up 60% of total revenue) — is directly tied to industrial production and construction activity. Both of which can take a hit in a global slowdown. On top of that, the Vacuum Technique segment (20%) rides the rollercoaster of the semiconductor cycle — notoriously volatile and unpredictable.

Put simply: macroeconomic headwinds and end-market risks are baked into the business model. They’re not going anywhere.

So, while the long-term stock price trend is clearly heading north, anyone following Atlas Copco needs to be comfortable with the occasional deep dive — we’re talking corrections of 40% or more from time to time.

And yet, the returns speak volumes. Over the past 20 years, the company has delivered an annual compound growth rate of 18%. That’s a CHF 10’000 investment turning into CHF 274’000.

Not too shabby.

Still, price volatility and sharp drawdowns are a small drop of bitterness in an otherwise compelling story. The clean, steady trajectory we at arvy love to see in a “Good Chart” gets a bit smudged here and there.

That’s no coincidence. Cyclical businesses, by nature, tend to ride economic waves—up and down. Which is exactly why we typically steer clear. At arvy, we prefer decent, sustainable growth with visibility over high growth wrapped in unpredictability.

But make no mistake: Atlas Copco is nothing short of impressive.

The question is: can you stay the course?

Chart 4: Atlas Copco over the last ten years, in $

Source: TradingView