Can water-damaged drywall be repaired, or does it have to be replaced?
The risk would be that the compound wouldn't bond to the scraped-away area, or that the remaining drywall would crumble over time. It would be much better to cut out the area and patch it, and it wouldn't be that much more work.  

If you do decide to try it though, you might want to use some fiberglass mesh tape to reinforce the patch.