AT&T's (NYSE:T) massive $7.1 billion loss in the third quarter shouldn't come as a shock. The struggling long-distance phone company warned of the trouble weeks ago with its decision to write down $12.5 billion in assets and lay off 12,500 employees.

What's more surprising is that AT&T's results were less bleak than expected. While total sales fell 12% to $7.6 billion, Wall Street was expecting sales of $7.3 billion. Revenues from AT&T's business services unit held steady from the second quarter for the first time in two years, despite predictions that business revenues would continue to fall.

AT&T's third-quarter report is fairly upbeat. The market seems to like AT&T's $3.5 billion cash balance and free cash flow generation that -- at least for now -- is propping up AT&T's $0.95 per-share annual dividend.

But Fools take note: Don't get too excited about a couple of less-bleak-than-expected numbers. AT&T still has more than its fair share of risk. There are good reasons to steer clear of the stock -- especially at its current price of $15.96.

AT&T's departure from its $8 billion consumer long-distance business will likely translate into even faster revenue declines. Falling revenues translate into shrinking free cash.

AT&T is gambling on the business unit for future growth. Investors should be concerned about growth in the corporate segment in the face of brutal price competition from MCI (NASDAQ:MCIP) and Sprint (NYSE:FON), and even cable operators such as Comcast (NASDAQ:CMCSA) and Baby Bells Verizon (NYSE:VZ), SBC Communications (NYSE:SBC), and BellSouth (NYSE:BLS) have a stake in the market. The long-haul business environment is going to be tough, to say the least.

Sure, AT&T has aggressively cut its debt from a peak of $60 billion through asset sales and debt buybacks, but net debt still comes in at a hefty $7 billion. AT&T has to take care of other obligations, including pensions and retirees' health. Plus, this month's big asset writedown will drive up AT&T's deferred tax bills in the coming years.

Valuing AT&T is tricky. AT&T is trading at a free cash multiple of 4 and a price-to-earnings ratio of 10, well below its peers. But, with AT&T's rapidly shrinking business, multiples of free cash flow and even earnings could be a "value trap" for investors.

Given the double-digit revenue declines, AT&T's 6.2% dividend yield doesn't look too enticing. Consider that long-distance competitor (and Motley Fool Inside Value recommendation) MCI yields 10%; SBC Communications, with its sturdy business model, yields a healthy 4.7%. An 8% yield is probably more apt for AT&T given its risky outlook, which prices the company at about $12 per share.

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Fool contributor Ben McClure hails from the Great White North. Ben doesn't own any shares mentioned here.