Is it possible for Neovim to understand vanilla Vim's undo (*~ & .*.un~) files?
Even if I have vim.opt.undodir = vim.fn.expand("~/.config/nvim/undo") set in ~/.config/nvim/init.lua?
Unfortunately the undo file format is not the same for Vim and Neovim since Neovim 0.4.4. See the following commit of 3rd of March 2021.
In consequence you can't simply copy your Vim undo files of Vim to the Neovim undo file folder and expect that Neovim will use them.
Conclusion: If you switch to Neovim you'll lose your Vim undo files.
:help undo-persistence. An external formatting tool will break undo persistence. While this is without doubt a highly useful feature, I'd not rely too much on it. They're notably not a replacement for a proper VCS.