That's not how this setting works. It does not apply to Guest users at all. "Email verified" users means a user what has an email address associated with a domain verified in your tenant. I.e. if you have verified contoso.com, any user with email of user@contoso.com will be able to self-provision an account in your tenant, if this setting is on.
In contrast, Guest users need to be invited, regardless of the setting value. They will have a "creation method" value of "invitation", whereas self-provisioned users have "EmailVerified".