Label parts of speech. Water droplets in the sky are called precipitation.

Yes, but it's not a noun functioning as an adjective, it's an adjective functioning as an adjective, since "water" is an adjective as well as a noun. If it weren't an adjective, it also would not be a noun functioning as an adjective, as there is no such thing, but a compound noun. You see compound nouns in terms like "proxy server" and "police car." Neither "proxy" nor "police" are adjectives. Rather, they are each the first half of a two-word noun.