So, I am new to the world of cPanel. How does cPanel's addon domain feature work? Does it utilise Apache Web server's VirtualHost feature? Or does it do something else?
It simply creates a directory for each add on domain and directs traffic to it. If you have an existing domain example.com and you want to add example-1.com, it creates another directory example-1.com at your root. It then creates multiple paths to your domain, http(s)://example-1.com and http(s)://example-1.com/example.com. If you're using a CMS like WordPress, you can then install WordPress directly in the new directory.
See image below: