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Search giant Google (GOOG) reported better than expected fourth quarter results Tuesday afternoon. Revenue, excluding traffic acquisition costs (TAC), grew 39% year-over-year to $11.3 billion, a tad short of expectations. Earnings, adjusted for extraordinary items, were up 12% year-over-year to $10.65 per share, exceeding consensus estimates. We still like the company's current valuation.

Google's core business continued its strong performance during the fourth quarter. Total revenue at the core business soared 22% year-over-year to $12.9 billion. Google-owned sites and Google network sites experienced strong growth of 18% and 19%, respectively. Traffic acquisition costs grew a little faster than revenue, up 25% year-over-year, a trend we will continue to monitor closely, but this could simply be a result of the shift to mobile. Paid clicks surged 24% year-over-year, mitigating the impact of cost-per-clicks declining 6% compared to the same period a year ago. Lower cost-per-clicks were the concern brought about by the third quarter, but we're encouraged by the sequential pricing improvement, and we believe improved ROIs on mobile advertising will help prevent substantial erosion. Facebook's (FB) mobile ads business might be slightly better, but we think this is a classic situation where the business has such strong secular tailwinds that both companies can experience fantastic growth.

In Google's core businesses, we're excited about the incredible growth at YouTube. After stealing the company for $1 billion a few years ago, Google has successfully worked to monetize the site's huge user base and surging popularity. Chief Business Officer Nikesh Arora provided this interesting insight:

"YouTube creators continue to vow and attract audiences. Outside estimate(s) say that video on which I am sure all of you have seen of PSY, his hit song, Gangnam Style, now the most watched YouTube video for all times, it generated over $8 million in all-in advertising deal. YouTube Partner revenue has doubled for the fourth consecutive year and thousands of channels are now making six figures annually."

The last part of this quote (bolded) explains just why YouTube can continue to be successful: content creators can make a profitable living. So long as this is the case, we think YouTube will be able to maintain quality content that also happens to be timed properly for shrinking attention spans.

Revenue growth at the firm's 'other' segment particularly stood out, more than doubling year-over-year to $829 million. These revenues, which include Google Play and hardware sales, could become a more important part of the overall revenue mix going forward. Though we think Google's core advertising business is fantastic and has a profitable long-term future, we believe the firm's 'other' segment is what could really propel Google to a transformative company. CEO Sergey Brin briefly touched on the potential of self-driving cars, and we think that technology, combined with pet projects like Google Goggles and Google Fiber could materially push the needle-though we aren't sure when.

Motorola Mobility has struggled lately, weighing on Google's overall profitability. While some speculated that Motorola was simply acquired for patent protection, the company remains committed toward building its product portfolio. We think its recent decision to relocate the company from the Chicago suburbs to downtown Chicago indicates that management is honest. Let's not forget that Motorola essentially invented the mobile phone industry in the 1980's, and while it hasn't had a blockbuster phone since the Razr, the odds of reinvention under the supervision and influence of Google are good, in our view.

Overall, we thought Google's fourth-quarter results were fantastic, and the company continues to be a cash cow, generating $3.67 billion in free cash flow during the fourth quarter. The firm's high-margin businesses will give it plenty of money to reinvest in various projects. Shares currently trade near the low end of our fair value range, and we think there is further upside to come. We'll continue to hold shares in the portfolio of our Best Ideas Newsletter.

Source: Google's Search Dominance Reigns Supreme In Fourth Quarter

Additional disclosure: GOOG is included in our Best Ideas portfolio.