Penaranda joined the Hornets from the Serie A side on Deadline Day in February, but was immediately sent out on loan.
The attacker will be hoping for first-team chances in the Udinese squad, as he aims to make his breakthrough at the Premier League club.
A whirlwind 2015-16 season
A crazy 12 months for the youngster began in July 2015, when he was snapped up by Udinese from Deportivo La Guaira in his native, Venezuela.
He was immediately sent to Granada, where he began with the B-team and impressed the Spanish outfit so much that he was installed into their senior squad.
Penaranda, in fourth game for the first-team, scored a brace against Levante; this meant he became the youngest foreign player to do so in La Liga, beating Lionel Messi.
Of course, this would have perked up interest across Europe - in what was a run of four goals in four games - but Watford snapped up his signature.
In a deal that pushed close to the £10m mark, he was not at Vicarage Road for long, instead the 19-year-old was sent back out on loan to Granada.
He finished the season with them, playing his part in a mid-table finish. Overall Penaranda made 23 La Liga appearances, notching up five goals and four assists.
A bright future ahead
Not just impressive on the club scene, the talented forward also made his debut for the Venezuela national team this year and has six caps to his name already.
A statement on the club's website read, "Watford believe the highly rated 19-year-old's progress is best served in the immediate future with regular first-team football."
Udinese are, of course, part of the Watford and Granada trio that are own by the Pozzo family.