Hi Jessica Rodrigues‌,

Have you tried adding external email in "External Email Address" option in the action?

Also, you'll have to check the external sharing features of your SP Online farm. There are four types:

1. No external sharing – sites and documents can only be shared with internal users in your Office 365 subscription.

2. Sharing only with external users in your directory – sites, folders, and documents can only be shared with external users who are already in your Office 365 user directory. For example, users who have previously accepted a sharing invitation or users who you have imported from another Office 365 or Azure Active Directory tenant.

3. Sharing with authenticated external users – sites can be shared with external users who have a Microsoft account or a work or school account from another Office 365 subscription or an Azure Active Directory subscription. When folders or documents are shared, the user is not required to log in using a Microsoft Account or a Work or School Account - they are sent a one-time code that they can use to verify their identity.

4. Sharing with anonymous users – documents and folders (but not sites) can be shared via an anonymous link where anyone with the link can view or edit the document, or upload to the folder.

Please check this MS document for above reference.

I hope this will be helpful.

Regards,

Kunal

Thank you for your response Kunal.  I don't see this "External Email Address" option in the action?  I am using the O365 Update Item Permissions action.

You need to use item permission action after updating an item.