VS Code not showing subfolders when there is only one

That's explained in November 2019 (version 1.41) release notes. The feature is called Compact folders in Explorer:

In the File Explorer, we now render single child folders in a compact form. In such a form, single child folders will be compressed in a combined tree element. Useful for Java package structures, for example.

Setting explorer.compactFolders controls this behavior. By default, this setting is turned on.

For anyone with the same issue, I figured out how to disable this. You need to look up explorer.compactFolders in File > Preference > Settings and disable it.