A. This is actually a Talmudic passage, Bava Batra 75a and Sanhedrin 100a.

B. Maimonides, in the well-known introduction to the chapter Helek, uses something very similar to the language here, “one who mocks the words of the Sages,” to describe someone who understands aggadot literally (and therefore ends up mocking them): “The second group are those who saw the words of the Sages or heard them and understood them according to their plain sense, and thought that the Sages intended nothing beyond what the simple meaning indicates. They thereby come to treat them as fools and to disparage them, slandering what contains no fault, and they mock the words of the Sages.”
Apparently Rabbi Yohanan accused the mocking student of exactly this: at first he understood it literally and mocked it. He should have understood that there is some hidden secret or intellectual claim here, and that there is no point in objecting that precious stones of such a size do not exist in reality.

C. The Maharal, in his novellae on aggadah, explains it in his own way. https://hebrewbooks.org/pdfpager.aspx?req=14192&st=&pgnum=114&hilite=

1. Precious stones means stones with divine qualities. Not only will Jerusalem in the time of redemption be entirely under higher divine providence, but even the walls—which are the boundary—even they will contain a manifest Divine Presence. (And perhaps this reflects a general idea: the boundary of a thing is part of the thing itself. And in order to identify what is outside the boundary, one must rise beyond the thing. And if one cannot, then one should remain silent.)

2. And when Rabbi Yohanan said that they take large stones and carve an opening into them, rather than building the entrance out of small stones, he meant that the finest thing is built from one complete unit, and all the details flow from one root. Even what appears at first glance to be an exception, something unfitting—like the carved opening itself, which is a hole and an empty space—is also an integral part of the thing itself. That is the quality of a good explanation (or a good theory): from the point itself all the conclusions unfold, without the need to pile on more and more ad hoc scaffolding. And perhaps we will merit to reach a unified theory even in matters of thought.

3. And when it says that the student’s ship went out to sea, this means that in his mind he entered into the depths of these matters and understood that the words are not to be taken literally in this world, but refer to the World to Come after the redemption, and allude to lofty matters. And he saw that even now angels are sawing stones—that is, the World to Come is not something completely separate from this world, but connected to it. The only difference is that things not everyone understands now in this world will be open, public, and known in the time of the World to Come. But the principles are the same principles, and therefore even in this world, at this very moment, one who knows how to delve deeply can already understand these matters.

4. And the student’s statement, “Had I not seen, I would not have believed,” means: had he not understood the inner meaning of the matter, he would have understood it literally and therefore not believed. In other words, at first he understood it literally and therefore mocked it. That itself is what it means to mock the words of the Sages—to think that they spoke empty nonsense like the most foolish simpletons in the field. But that is not so; rather, they hinted in their words at intellectual ideas. And precisely because the literal meaning leads to mockery, one should understand that it is not literal.
On the contrary, even with this aggadah, someone who understands it and settles only for the plain meaning of the words—as though they merely told us a practical future law that the wall of Jerusalem will be very beautiful—such a person has an element of mocking Torah scholars in him. About them Maimonides continues and says: “And this is an accursed group, because they answer back against great men and princes whose wisdom has been established among the Sages, etc.; had they understood, etc., the meaning of their words would have become clear to them.”
This fixation on the example and parable and on superficiality, and the resulting avoidance of trying to understand what the wise person is actually saying, is a major problem—as is known from the introduction to Sha’arei Yosher, which hit this point extremely well. Usually arguments do not succeed in changing someone’s mind unless he comes with some attentive point within himself that is willing to seriously examine the change for a moment; some inner decision is needed to give the argument a chance.

5. It’s all utility poles and chipopo, but in the end these are utility poles that have the power to summarize well arguments that seem meaningful to me. But indeed it is certainly true that a person only puts into the utility poles things that already seem right to him even before the pole.

D. A Jew by the name of Ritva also was not deterred from taking the words away from their literal sense, and he wrote:
https://hebrewbooks.org/pdfpager.aspx?req=16210&st=&pgnum=303
“His ship went out to sea and he saw the ministering angels”—meaning, it appeared to him in a dream vision. And some say that he delved deeply into wisdom and grasped the matter. He delved deeply into wisdom and grasped the matter—we are not especially interested in stones and gates, but in claims and messages. Except that in the World to Come the principles will be expressed openly in everything, without concealment, and the earth will be filled with knowledge as the waters cover the sea.

Note to myself:
In section C2 there is a claim that one unified explanation is preferable, one from which all the outcomes and exceptions flow directly; but in order to explain this aggadah itself, what we have here is a collection of separate, specific “explanations.” It seems to me that with God’s help my keyboard could tie it all together with a reed string, but that would already be excessive pilpul about utility poles.

Stubborn Ways, do you really think those interpretations are what the aggadah meant?