Lemonade (NYSE:LMND) and Rocket Companies (NYSE:RKT) both joined the public markets with initial public offerings this year. Lemonade is an insurance technology company that leverages artificial intelligence to sell renters and homeowners insurance, while Rocket Companies is the largest mortgage originator in the U.S.

Lemonade IPO'd in July and is currently trading roughly 75% higher than when it was first priced at $29 per share. Rocket IPO'd in August, offering shares at $18 and is currently trading about 14% higher than its offering price. Both have been volatile since their IPOs. Let's see which is better positioned to succeed.

Two jars of lemonade on a table with whole lemons and lemon slices.

Image Source: Getty Images.

The fintech play

Tech IPOs this year have performed incredibly well, with investors willing to pay up for promising long-term horizons and perhaps getting excited about how much more valuable tech services have become during the coronavirus pandemic. Lemonade is not yet profitable, though the company saw its stock price surpass $85 at one point because investors viewed it as an insurtech that is going to grow significantly.

Rocket, on the other hand, has not done as well, primarily because it has failed to convince investors that it is a fintech. In 2015, Rocket launched the first end-to-end digital mortgage app, Rocket Mortgage. But since that time, this kind of technology is much more common and really seen as a necessity in today's world, so it doesn't impress investors as much as it once might have. 

And if investors aren't viewing Rocket as a fintech, than what they see is a traditional mortgage company that is susceptible to the interest rate cycle. That means if the mortgage market is not sizzling, then Rocket won't perform as well and could struggle whenever the Federal Reserve raises interest rates again.

Future expectations

If you are just looking at recent profitability, then Rocket is by far the stronger company, reporting $3.5 billion in profits on total revenue of more than $5 billion in the second quarter of the year. Lemonade posted a net loss of $21 million.

But investing is all about looking ahead to the future, and Lemonade has a very bright future. Between the second quarter of 2019 and the second quarter of this year, the company grew customers by nearly 84%, reaching 814,000. Also, the loss of $21 million is the smallest loss Lemonade has reported in the last year. Lemonade is also seeing success at attracting younger customers, which is not always so common in the insurance business. More than 70% of the company's current customers are younger than 35, and many are suspected to be first-time customers.

Rocket, on the other hand, is enjoying some of its best quarters ever, but the success also shows how the company's business model is heavily dependent on volume. In the second quarter of this year, Rocket's $3.5 billion profit came from more than $72 billion in closed-loan origination volume. The company sells most of the loans it originates to the secondary market. But in the second quarter of 2019, the company only did roughly $32 billion and as a result, reported a loss of $54 million in that quarter.

Rocket generates a lot of activity from mortgage refinancings, which accelerated this year after the Federal Reserve dropped its benchmark lending rate from 2% to near zero in March. But the question is, once the mortgage market cools or when rates start to rise, can Rocket continue to remain profitable? It's not like Rocket is completely helpless when rates rise because the company also services many of the mortgages it originates and collects a fee for that service, but volume is still more important right now.

Rocket executives have said their goal is to continue to gain market share so that when rates do rise, they will already have a strong hold on the market. Specifically, executives on the company's most recent earnings call want to grab 25% of the mortgage market by 2030. However, the company currently only controls a little more than 9%, and the mortgage market is very fragmented, so the company has some work ahead of it.

A clearer picture

While Rocket Companies is the largest mortgage originator in the U.S. and certainly could get to 25% market share, Lemonade's future plans for success look much clearer, which is why I would choose to invest in the company over Rocket. Lemonade will use its technology and marketing prowess to keep growing its customer base, which will hopefully continue to include many first-time, millennial insurance buyers who are beginning to get used to buying lots of insurance products. Then it will eventually grow its product offerings and have a huge consumer base to cross sell to.