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I am confused about what is the Target Audience can be? Would it be AD group or SharePoint group?

Can someone please provide some light?

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SharePoint groups are not supported in audience targeting in SharePoint online.

Azure AD groups (including security groups and Microsoft 365 groups) are supported with the exception of AAD dynamic groups.

Documentation: Target content to a specific audience on a SharePoint site

Currently you can only use AD groups or Microsoft 365 groups to target audiences.

Source: Audience Targeting for Quick Links Web Part in SharePoint Online

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