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Link: https://learn.microsoft.com/en-us/sharepoint/what-s-new-in-sharing-in-targeted-release

Recipients of secure external sharing who also use Microsoft 365 in their organization can sign in using their work or school account to access the document. After they have entered the one-time passcode for verification the first time, they will authenticate with their work or school account and have a guest account created in the host's organization.

When using the above approach to assign permission to a folder in a document library, then does it mean guest user is created in AD by link sharing or direct access?

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Yes, a guest user is created in AD both by link sharing and direct access.

The first time they access the folder, they need to verify themselves using a one-time passcode. After they verify themselves, they sign in using their own work or school account. At this point, a "guest user" account is created for them in your organization's AAD. This happens whether you shared the folder with them directly, or if you gave them a link to the folder.

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  • I tried this and can confirm that link sharing doesn't result in guest user creation in AD
    – variable
    Jan 5 at 9:27

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