At Ignite we announced a major improvement to the way secure external sharing of files and folders works in both OneDrive and SharePoint in Office 365 and we wanted to share what this means for users...
Updated Jun 25, 2020
Version 4.0
Blog Post
I couldn't tell if the account was added to the Guests in Azure AD before or after the share. So I ran this scenario again on a "clean" tenant without any existing guest users. In my tests, it worked as Stephen described (yay). I tried this with gmail, outlook, company accounts and all got the link for non-guests and direct access for guests (even if they never responded to the invitation to AAD).
What was interesting is that new guest users appear in the people picker very quickly but when I deleted a guest user from AAD and then tried to use the new sharing link method with this deleted user account, I actually get this error.
The user account is still visible in the hidden user list but is flagged as deleted in the SharePoint user profile service.
Please keep this thread updated if you encounter interesting findings.