Woke up this morning with no hot water. Went to check the water heater and found that some of the wiring in the water heater control panel (leading/near the thermostat) were burnt. I also noticed some blackened areas on the side of the water heater.
So here is my question. Is is OK to replace the wiring and perhaps the thermostat OR is the water heater toast?

The water heater tank is just that a tank. If it's 10 yrs old consider replacing everything. Check for leaks.

Poor connections cause heat in unwanted places. Replacing and re-wiring should be fine.