Hi @Dave Ungar ,
This issue occurs because external users can't run Active Directory queries in the people picker in SharePoint Online. The workaround is that when inviting guest user in SharePoint, you should type the complete email address in the text box instead of display name of the guest user. People picker will work after you type the email address in the text box. This is by design as per my knowledge.
See this article from Microsoft: External users can't find users in the people picker in SharePoint Online.
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