Technically it is 水の色 (water's color). Often times particles like 「は・が・の」 are dropped when the context allows for such, making 水の色 turn into 水色.

Same thing happens with 葉の色 becoming 葉色 (leaf green). The の is implied.

In English one might say that something is "sky blue" instead of saying "the color of the sky". So it's not uniquely Japanese in that sense.

Technically, 水色 appears in both Japanese and Japanese-English dictionaries, so I'd say it's a word by any reasonable definition. (Disclaimer: not a native speaker.)

It's a word in its own right - but the etymology of it is still important and I feel it was slightly misrepresented.

For example, the greeting many people know 「こんにちは」 (konnichiwa) is a word in its own right nowadays, but is really just the beginning of an older greeting: 今日は御機嫌いかがですか

Dropping の can create a different meaning. For example, 日本料理 (Japanese cuisine) and 日本の料理　(cooking in Japan, which could well be used to refer to the quality of the italian or chinese food here). The former is truly a single word and the latter two words separated by a particle.