Is this a gay joke? Or the nipping in the bud of a gay joke in the works? It is very often played that way. Or maybe it’s just a generic averted sex joke. A sort of “Maybe men don’t delight you but I know a woman in Wittenberg who’d delight you no end.”
In any case, it’s another clumsy move by Rosencrantz. Hamlet’s pouring out this serious poetic exploration, full of truth and darkness and depth and Rosencrantz starts in with a lascivious smile? Or at least one that Hamlet can interpret as such.